FTSE 100 stocks have a reputation for providing bountiful dividends. With the UK’s flagship index home to the largest companies on the London Stock Exchange, this isn’t exactly surprising. After all, mature industry titans are usually the ones to reward shareholders with generated surplus cash.
Of course, not all of these enterprises are worthy of investment. Even the largest companies have been disrupted in the wake of rising interest rates, with some having to undergo radical restructuring just to keep the lights on. However, one business that continues to impress is DS Smith (LSE:SMDS).
Boring and dependable
When it comes to income stocks, being boring can be a useful advantage. These unimpressive companies rarely catch media headlines, allowing them to fall under the radar of most investors. As such, locking in a higher dividend yield becomes far easier.
That certainly seems to be the case for this cardboard and paper packaging business. DS Smith is one of the largest producers of corrugated cardboard in Europe, serving a wide range of customers, including the e-commerce giant Amazon, among others.
Since inflation started plaguing economies worldwide, demand for the group’s packaging products has been on a downward trajectory. With consumer spending in the gutter, the volume of goods bought and sold online has dropped, as has discretionary spending in other sectors, resulting in lower demand.
Yet, despite these headwinds and a shrinking top line, DS Smith’s profit margins have proven far more resilient than expected. Internal investments into improving efficiency as well as exercising pricing power to offset input costs have helped keep leverage in check as well as maintain shareholder dividends. And now that economic conditions are on track to slowly improve throughout 2024, earnings growth looks set to make a comeback in the second half of this year.
Building a £1k income stream
With the group’s dividend yield at 6.4%, investors will need to buy roughly £15,625 worth of shares. That’s obviously not pocket change. But achieving this goal is far more manageable when steadily building up to it over time. By buying 35 shares a week for just under £100 at today’s stock price, investors could hit the target passive income within three years.
Furthermore, reinvesting any dividends received in the meantime could drastically accelerate this time horizon. Not to mention that any dividend hikes issued during this period can cut the waiting time even further.
Of course, it’s important to remember that dividends are never guaranteed. Suppose the economic conditions continue to worsen in the short term? In that case dividends may end up getting cut over the next three years instead of bolstered. This not only increases the number of shares an investor would have to buy but would also send the stock price firmly in the wrong direction.
The group’s solid track record makes this a risk worth taking, in my mind. But when building an income portfolio, it’s likely a prudent move to diversify across multiple high-quality businesses. That way we can prepare for the worst-case scenario.
