One of my preferred ways of earning a second income is to invest in stocks that provide a generous dividend.
As a risk-averse investor, I tend to focus my attention on members of the FTSE 100. But I often fall into the trap of only looking at the more recognisable companies in the index.
However, I recently changed my thinking and decided to examine one of the lesser-known stocks.
DS Smith (LSE:SMDS) is a provider of sustainable packaging solutions, paper products, and recycling services.
Even though it’s not a household name, I reckon most people will have used its cardboard boxes. That’s because one of its largest customers is Amazon.
Last year the company paid a dividend of 15p per share. The stock is therefore currently yielding 4.8%. However, in respect of its 2023 financial year, the company has announced a 25% increase in its interim payout. If (as expected) the final dividend is raised by the same amount, the stock is offering an impressive 6% return.
Like all UK adults, I’m able to invest £20,000 in an ISA during the 2023/24 tax year. If I was able to invest the full amount in DS Smith shares, I could earn a second income of £1,200 this year.
Performance
For the year ended 30 April 2023, the company is expecting earnings before interest, tax, and amortisation (EBITA) of at least £850m.
If achieved, this would be a 38% increase on last year.
This excellent performance appears to have gone largely unnoticed by investors. Since its trading update was released at the end of April, the company’s shares have risen by just 2%.
| Financial year (30 April) | Revenue (£m) | EBITA (£m) |
| 2018 | 5,518 | 492 |
| 2019 | 6,171 | 631 |
| 2020 | 6,043 | 660 |
| 2021 | 5,976 | 502 |
| 2022 | 7,241 | 616 |
When analysing companies, it’s always useful to make a comparison to others of a similar size, operating in the same industry.
Fortunately, there’s another stock in the FTSE 100 that sells sustainable packaging.
A bigger rival
At £6.12bn, Mondi‘s stock market valuation is 43% higher than that of DS Smith. But in its last full financial year, its revenue was only 7% more than its smaller rival. Ignoring a one-off gain, its profit before tax was three times’ higher.
However, Mondi is less confident about future trading. Last week, the company released a trading update for the first quarter of 2023. EBITDA (earnings before interest, tax, depreciation, and amortisation) was the lowest it has been since the last quarter of 2021. The company reported lower average selling prices and softer demand.
Both companies have similar forward-looking price-to-earnings (P/E) ratios. But Mondi’s expected dividend yield is currently lower, at 5%.
The global packaging market is estimated to be worth $1trn. There are clearly huge opportunities for both companies, but if I had to choose one to include in my portfolio, I’d go for DS Smith. Its directors appear to be more optimistic about its prospects and its offers a higher yield.
However, reliance on Amazon makes it vulnerable should its key customer decide to look for another supplier.
One problem
Unfortunately, I’m not in a position to invest right now.
But, I’m due to receive some dividends soon from other investments I’ve made. After I bank these, I’ll consider buying some shares in DS Smith to generate another income stream.
