The FTSE 100 is filled with stocks that serve as titans of their industry. After all, this index is the home of the largest corporations on the London Stock Exchange. And it’s often a popular destination for passive income-seeking investors.
One firm that’s caught my attention recently is a boring cardboard manufacturer called DS Smith (LSE:SMDS). The idea of investing in a paper packaging company understandably sounds dull. But it’s hard to resist a 5.2% dividend yield that continues to grow.
The FTSE 100’s unsung hero
DS Smith is the largest supplier of corrugated cardboard across the UK and Europe. Serving customers like Amazon and Tesco, the firm is responsible for producing most of the packaging used to fulfil online orders.
In the ongoing economic climate, consumer discretionary spending has suffered. Consequently, e-commerce businesses have naturally endured reduced levels of demand which have been passed onto this FTSE 100 stock. And looking at its latest interim results, this has translated into a 3% decline in order volume.
However, despite this dip, the group’s critical position within UK and European supply chains have granted it a staggering amount of pricing power. Subsequently, revenue over the six months leading to December 2022 grew by a whopping 28%!
Moreover, with the price hikes outpacing cost inflation, margins have expanded drastically. As a result, operating income for the period surged 72%. And a recent trading update from management indicates this momentum has continued into 2023.
Building a £1,000 income stream
On the back of such impressive results, the interim dividend was bolstered by 25%. And now, the FTSE 100 stock offers a 16.2p payout per share. Versus today’s stock price of around 315p – that’s a yield of 5.15%.
After crunching the numbers, to generate a £1,000 passive income, an investor would need to own 6,173 shares. That roughly equates to a £19,400 investment – not exactly pocket change. But the barriers to entry may not be as high as they seem.
There’s nothing stopping investors from gradually building up this position over time. Consistently investing a small amount each month and reinvesting any dividends taps into the power of compounding while establishing the desired income stream. Plus, if management continues to increase payouts, the time required to hit the £19.4k milestone could be drastically shortened.
However, there’s a giant caveat to this entire endeavour. Dividends aren’t guaranteed. Shareholder payouts are ultimately funded by earnings. And if economic conditions worsen, volume decay could intensify. And while DS Smith could try to offset this with further price hikes, there is a limit on how much it can get away with. Even more so given the increasing number of competitors, the firm has to contend with.
Nevertheless, given the group’s track history of successfully navigating unfavourable operating environments, I remain cautiously optimistic. And that’s why I believe DS Smith could be one of the best income stocks in the FTSE 100 to buy today.
