I’m using this summer to buy FTSE 100 dividend shares to generate a second income for my retirement. July could prove a good time to go shopping for shares, as economic worries mean there are bargains to be found.
I’m tempted to buy another housebuilder like Persimmon, which combines an ultra-low valuation of 4.46 times earnings and sky-high yield of 5.67%. Yet I think the sector is a little bit too risky today given the mortgage crunch. I’ll swoop when interest rates peak.
By contrast, pharmaceutical firm AstraZeneca is super expensive, trading at 69.56 times earnings, while yielding just 2.09%. Its share price performance has been markedly different too.
I’m looking for bargain high-yielders
While Persimmon is down 58.14% over five years and 41.41% over one year, AstraZeneca has soared by 117.83% over five years and 10.04% over the last troubled 12 months. Right now, the FTSE 100 is full of dirt cheap, high-yielding income stocks. I’m in no mood to buy one of the most expensive of all.
Paper and packaging group DS Smith (LSE: SMDS) fits my bill. It’s cheap, trading at just 6.2 times earnings, but looks undervalued and underappreciated. Its share price has fallen 44.4% over five years, by 5.3% over 12 months, and this looks like an opportunity to buy it.
The DS Smith share price fell 3.38% when it published full-year results on Thursday, then another 4.39% on Friday. That’s despite management describing them as “excellent”, alongside all the usual stuff about a “challenging economic environment“.
DS Smith’s revenues jumped 11% to £8.2bn in 2023 on a reported basis, while adjusted profits before tax rocketed by 75% to £661m. Mr Market took a dim view of the detail though, which showed rising prices offset by higher costs and falling volumes.
Inflation is the enemy as it hits the firm on two fronts. First, it has driven up labour and materials prices. Second, it has reduced demand from cash-strapped consumers.
The environment is another threat, amid a backlash against excessive packaging. Yet DS Smith is making progress here, replacing about 300m pieces of plastic with fibre-based alternatives. Net debt crept up slightly to £1.6bn but the ratio of net debt to EBITDA earnings fell from 1.6 to 1.3 times.
A little risky but very rewarding
Management rewarded investors with a total dividend per share of 18p, up 20% on 2022. The forecast yield is now 16.9%, nicely covered 2.3 times by earnings.
The obvious issue is the murky economic outlook, as the cost-of-living squeeze will continue to deter online shoppers, while the wage-price spiral drives costs higher still. That would worry me if I was only holding the stock for six months.
However, like all the shares I buy, my aim is to hold for a minimum of 10 years and ideally much longer than that. That gives DS Smith shares plenty of time to show their worth.
This is based on the assumption that when people have money in their pockets again, they will buy more stuff online and it will be delivered in cardboard boxes. The danger is that we are permanently poorer and will stop doing that quite as much.
But I don’t think so. I’d like to take advantage of today’s low valuation and buy DS Smith in July.
