At the time of writing, the best flexible Cash ISA interest rate on the market is just 1.36%. This rate of interest is so bad that most FTSE 100 stocks now offer higher dividend yields.
For example, take global champions Unilever (LSE: ULVR) and Prudential (LSE: PRU). At the time of writing, these FTSE 100 blue-chips support dividend yields of and 3.4% and 3% respectively.
Today I’m going to explain why I believe these two dividend champions can help you make a million in the stock market.
Long term growth
Unilever is one of the world’s largest consumer goods companies. This makes the business highly defensive and profitable. Last year, the group reported an operating profit margin of nearly 25%, more than double the London market average.
The company’s fat profit margins mean it has enough cash to return money to investors and reinvest profits back into the business to support growth.
According to my research, last year, Unilever generated €6.7bn of cash from operations. It reinvested €1.5bn of this total and returned €10bn to shareholders with dividends and share buybacks. The gap between cash generated from operations and total spending was filled with asset disposals (€6bn).
Unilever’s earnings growth has averaged 10% for the past decade. As long as management continues to spend on developing the group’s product offering, I don’t think this trend is going to come to an end any time soon.
It’s this growth, coupled with Unilever’s dividend that leads me to conclude that the stock can help you make a million. Earnings growth of 10%, coupled with a dividend yield of 3%, implies an investment in Unilever can return of 13% per annum going forward. At this rate, I calculate it would take contributions of just £100 a month for 37 years to make £1m.
Prudential has the same attractive qualities as Unilver, in my opinion. After recently separating from its UK-focused asset management division, Prudential is now an Asia-focused life insurance and long-term savings business.
Without the legacy UK business holding back performance, City analysts are forecasting earnings growth of nearly 70% for Prudential when it reports on FY 2019 next year, putting the stock on a forward P/E of 9. Earnings are forecast to expand a further 9.3% for FY 2020.
I think the likelihood of the company meeting these targets is high. Over the past decade, demand for Prudential’s products in its Asian markets has been growing at a double-digit rate. As the region continues to develop, analysts reckon this trend will continue.
From 2013 to 2017, gross written premiums for general insurance grew at an annual rate of 15% across the Asia-Pacific region, according to one study. If Prudential can match this growth, I think shareholders will be well rewarded over the next few decades.
With 13-14% per annum returns on the cards, Prudential also has the potential to turn small monthly investments into a million-pound savings pot over the long term.
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Rupert Hargreaves owns shares in Unilever and Prudential. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019