The FTSE 100 is home to some of the most generous dividend stocks listed on the London Stock Exchange. The index as a whole has historically yielded around 4%. But many of its constituents offer considerably more. And after all the recent volatility, income investors are spoilt for choice.
One company in particular could enable investors to establish a £1,000 passive income stream in just three years.
Unleashing the power of cardboard
Compared to the innovations of biotechnology, investing in cardboard is arguably one of the most boring ideas around. But despite the simplicity of this product, it serves a vital role in modern society regarding logistics and e-commerce.
DS Smith (LSE:SMDS) is one of the largest cardboard manufacturers in the UK and Europe. Demand for its products has weakened with the slowdown of consumer discretionary spending. That’s not really surprising since fewer online orders mean fewer cardboard boxes being purchased by retailers.
However, while packaging volumes are contracting, management is completely offsetting this decline by exercising its pricing power on customers. Manufacturing cardboard doesn’t have high barriers to entry. But doing it on a massive scale isn’t exactly easy. And many of the firm’s largest customers, like Amazon, can’t simply switch to a cheaper competitor that can match the required output.
Needless to say, this bodes very well for the FTSE 100 stock. And it’s also how management was able to raise shareholder dividends by 25% in December. Skip ahead to this month, and in a recent trading update, the company is still taking more market share as its smaller competitors struggle in the challenging operating environment.
Making £1,000 with this stock
Combining the recent dividend hike with stock market volatility has resulted in a yield of 5.32%. So an investor seeking to earn £1,000 passive income at this level would need to buy roughly £18,797 of DS Smith shares.
Needless to say that’s not exactly loose change. But breaking it down over three years, it becomes far more affordable. In fact, investing around £120 a week into this stock will reach the target milestone by March 2026. That’s roughly equal to buying 40 shares a week at today’s price.
But suppose the yield continues to increase as management raises dividends further? In that case, building a £1,000 passive income stream may be faster than expected. Unfortunately, the opposite could also be true.
A sudden disruption of DS Smith’s cash flows would likely see dividends diminish. And even if the business continues to thrive, a rising share price can also drag down the yield. Therefore, investors may have to put in more capital than expected for longer to hit their income goal.
Nevertheless, given the long-term reward, it’s a journey and risk worth taking, in my opinion.
