The FTSE 100 has an abundance of quality, high-yielding stocks. And thanks to all the ongoing economic uncertainty, investors are spoilt for choice, with nearly 40% of the index offering shareholder payouts in excess of 4%.
For investors who capitalise on this opportunity, a respectable passive income could be achieved, even with modest sums of capital.
In fact, buying just 35 shares each week in this industry stalwart could secure a £1k passive income within just a few years. Here’s how.
Boring but reliable
Income stocks aren’t normally known for having exciting enterprises beneath them. These businesses tend to remain relatively stable with modest share price appreciation. Why? Because with large amounts of capital being redistributed to shareholders, the level of internal growth investment tends to be quite low.
However, provided operations generate impressive cash flow, boring companies can be tremendous sources of wealth. And that’s certainly the impression I get when looking at DS Smith (LSE:SMDS).
Compared to the life-saving innovations from biotech stocks, investing in a cardboard & paper packaging company is hardly a thrilling prospect. Yet with e-commerce continuing to take market share from brick & mortar retail, demand for the group’s environmentally-friendly products is rising rapidly.
Even during this cost-of-living crisis, sales and earnings are growing by double digits, with dividends following suit. This has been a fairly consistent trend over the last decade. In fact, before the pandemic threw a spanner in the works, management grew shareholder payouts for 10 years in a row (between 2009 and 2019). And while the streak was broken in 2020, the dividend per share today is already ahead of pre-pandemic levels.
With e-commerce adoption expected to continue mounting, demand doesn’t seem to be going anywhere. And at a P/E ratio of just 8.4, this FTSE 100 stock looks like a bargain income opportunity, in my eyes.
Making a £1,000 passive income
At today’s share price, DS Smith offers a yield of 5.9%. Therefore, to achieve a target of £1,000 in annual passive income, investors would need to own roughly £17,000 worth of shares.
Needless to say, that’s not pocket change. But by consistently investing small sums, investors can build up to this target over a few short years.
For example, if I snap up 35 shares each week, that would cost me roughly £101.50, or £406 a month. After a year, I’d have around 1,820 shares, generating a passive income of £327.60. If I reinvest the dividends and continue to inject more capital each week, I could potentially hit my £1,000 passive income target in just over three years.
Taking a step back
As alluring as this prospect sounds, there are several caveats to consider. For starters, I’ve assumed that DS Smith keeps its dividend policy on a constant. The group’s track record suggests that payouts will increase, accelerating the timeline. However, should cash flow be compromised by another Covid-like event, dividends could get cut instead.
After all, no business is immune to disruption. And if the company fails to meet expectations, the generated passive income could be far smaller than anticipated.
Personally, I remain cautiously optimistic. Therefore, while the risk can’t be ignored, it’s one worth taking, in my opinion. That’s why I’m considering adding this business to my income portfolio once I have more capital at hand.
