I’ve just added what I hope is a cracking FTSE 100 income stock to my portfolio, but it isn’t one of the obvious high yielders, such as insurer Aviva or tobacco giant Imperial Brands.
That isn’t to criticise them. Aviva is set to pay a dazzling income of 8.35% this year, well above today’s FTSE 100 average yield of 3.56%. It’s also cheap, trading at 7.53 times earnings.
Two top dividend shares
Imperial Brands has similar attractions. It yields 8.17% a year, and is even cheaper, trading at 6.5 times earnings. As a benchmark, the average FTSE 100 stock currently trades at 9.9 times earnings. Both should deliver plentiful dividends over the years and, with luck, they might muster some share price growth as well.
I didn’t buy Aviva because I’ve recently loaded up on rival insurer Legal & General Group, and I’m always keen to diversify. Personally, I don’t buy tobacco manufacturers. If I did, I would have bought Imperial Brands years ago.
On Friday, I went in a different direction and bought paper and corrugated packaging specialist Smurfit Kappa Group (LSE: SKG) instead. At first glance, it’s nowhere near as exciting, with a forecast yield of ‘just’ 4.36% this year. That’s still comfortably above the FTSE 100 average, but way lower than Aviva and Imperial Brands.
The good news is that it also looks decent value, currently trading at 7.67 times earnings. That’s partly a result of the share price falling 5.46% over the last year. The main reason I favoured it over Aviva and Imperial Brands is that I think Smurfit Kappa has the chance of delivering steady share price growth over time, as well as income.
Its 2022 results showed earnings climbing an impressive 38% to €2.35bn, with pre-tax profit up 42% to €1.29bn. That’s despite today’s challenging conditions, as inflation drives up the company’s costs, while cash-strapped consumers buy less stuff online.
I bought Smurfit stock with a minimum five-year view, although if all goes well, I expect to hold it for a lot longer than that. My plan is that buying it today, when the economy is floppy and the share price is relatively low, I will benefit when the economy rallies and Smurfit Kappa (hopefully) lives up to its promise.
I’ll take my time with this one
In the meantime, I’ll reinvest all of the dividends I receive to pick up more stock in the company. Management pursues a progressive dividend policy, recently lifting its final dividend 12% to 107.6 cents per share. This should give me a rising income over time.
There are risks, of course. The world could lose its taste for online shopping (that seems unlikely). Net zero moves could trigger a backlash against excess packaging, although Smurfit Kappa has protected itself through an eco-overhaul. The immediate worry is that inflation looks as if it could stay relatively high, while the US may fall into a recession. If that happens, sales will suffer and the recovery will be delayed.
I’m not expecting an instant return from Smurfit Kappa, but I’m hoping that when the outlook brightens, this paper tiger will show it has teeth.
