The UK’s flagship index is home to an abundance of passive income-providing dividend stocks. And it can often be challenging to pick which shares to snap up when looking to bolster my dividend stream. Today, around a third of FTSE 100 companies offer yields higher than its historic average. But among all these interesting opportunities, one stands out as the most promising right now.
Let’s take a closer look.
Boringly reliable
Dividend stocks aren’t always the most exciting enterprise to invest in. But that doesn’t make them any less lucrative. Take DS Smith (LSE:SMDS) as an example. The cardboard and paper packaging company isn’t exactly curing cancer like some innovative biotechs. But with e-commerce adoption continuing to rise, demand for sustainable packing for order fulfilment is going through the roof.
Even in the current cost-of-living crisis, where households are looking to cut spending, e-commerce remains strong, providing a powerful tailwind for Europe’s largest cardboard manufacturer. And that’s translated into some chunky cash flows, which have, in turn, funded an ever-increasing dividend.
Prior to the pandemic, shareholder payouts have been climbing since 2009, growing by roughly 470% over a decade. This impressive streak came to an end in 2020 as management sought to retain capital during the pandemic. But dividends have since resumed and are now ahead of 2019 levels and seemingly on track to continue rising.
Passively earning £1k
At a 6% dividend yield, investors will need to allocate around £17,000 of capital to unlock a £1k income stream. Sadly, not everyone has that kind of cash in the bank. But building up to it over time makes it still obtainable for less cash-rich households.
At the current share price of around 300p, buying 38 shares a week, or 152 shares a month (worth £456), would unlock the target passive income of £1,000 within three years. And that’s assuming dividends don’t continue to rise.
However, as exciting as this prospect sounds, like any investment, there aren’t any guarantees of success. A resurgence of inflation in the UK or European countries could hamper sales for online businesses which, in turn, would reduce demand for packaging products.
While DS Smith is seemingly well-capitalised, a prolonged period of poor online spending would likely negatively impact cash flows. Needless to say, in this scenario, dividends could be put in jeopardy along with the share price.
Despite this threat, I remain cautiously optimistic about the long-term potential of this enterprise. It’s not the only company capitalising on the tailwinds of the e-commerce order fulfilment market. But, so far, most competitors have failed to reach the same level of production, making DS Smith the go-to provider for some of the largest names in online shopping, such as Amazon.
