FTSE 100 dividend stocks can offer a potent mix of income potential and capital growth prospects. Even if they don’t necessarily offer a significantly higher yield than the wider index, their capacity to generate rising dividends over the medium term can lead to greater demand from income-hungry investors. This can gradually push their share prices higher.
With that in mind, here are two FTSE 100 dividend stocks that may not have the highest yields in the index, but which could offer favourable risk/reward ratios for the long term. Buying them now could prove to be a sound move for investors who are seeking to beat the index from a total return perspective.
Packaging specialist Mondi (LSE: MNDI) has an excellent track record of raising dividends over recent years. In fact over the last four years, it has increased dividends per share at an annualised rate of 16%. This means it now has a yield of around 4%, which is in line with the income return of the wider FTSE 100.
Looking ahead, Mondi could offer continued fast-paced dividend growth. The company’s dividend payout is covered 2.3 times by profit. This suggests its dividend growth rate could be higher than the rise in its profit without hurting the financial standing of the business.
Although the stock is expected to record a rise in earnings of just 6% this year, its valuation suggests capital growth could be on the horizon. Mondi trades on a price-to-earnings (P/E) ratio of just 10, which is relatively low in comparison to many of its FTSE 100 peers.
Therefore, while perhaps not the most exciting of stocks in terms of its growth potential, the company’s low valuation, impressive yield and dividend growth potential could make it a highly attractive income stock. As such, now could be the right time to buy.
Another FTSE 100 packaging specialist, DS Smith (LSE: SMDS), could also offer an impressive long-term outlook. The company is expected to post a rise in earnings of 8% in the current year, which suggests it has a sound strategy which is working well in what remains an uncertain wider industry.
With a dividend yield of 5.5%, the stock offers one of the highest income returns that’s currently available within the FTSE 100. And since its dividend payout is covered 2.3 times by profit, there’s scope for an inflation-beating rise in shareholder payouts over the coming years. It could even continue its double-digit dividend rise of the last four years without putting the company’s finances under strain.
Since DS Smith trades on a price-to-earnings growth (PEG) ratio of 1.7, the company’s shares may also offer capital growth potential. As such, it could be a worthwhile purchase for income and growth investors alike, having the potential to outperform the FTSE 100 over the long run.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.