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£500 to invest? A 5%-yielding FTSE 100 gem I’d buy shares in right now

Front view photo of a woman using digital tablet in London
Front view photo of a woman using digital tablet in London

Despite all the stock market volatility this year, many FTSE 100 shares have proven to be a beacon of resilience. But that doesn’t mean all of the index’s constituents were so lucky. There are plenty of companies caught in the panic-selling cross-fire, with their market capitalisations tumbling by double digits.

One example is DS Smith (LSE:SMDS), which, even after a recent share price rally, is still down 20% over the last 12 months. However, could this be an exceptional buying opportunity for income investors with £500 to spare? After all, with shares being dragged down and dividends remaining intact, the yield is hovering at 5% today.

A gem hiding in plain sight?

As a quick reminder, DS Smith is a specialist in manufacturing and supplying various forms of cardboard. That’s hardly the most exciting enterprise. But with the continued rise of e-commerce, demand for such products has been skyrocketing over the last decade, especially when made from recyclable materials.

The stock’s recent lacklustre performance isn’t too difficult to comprehend. A slowdown in consumer spending has had a notable impact on the online shopping industry. And with fewer orders being shipped, the demand for corrugated cardboard boxes seems to have hit a short-term hurdle.

Yet it seems these woes may soon be over. Even with fears of a looming recession, the latest results for these FTSE 100 shares are pretty extraordinary. In fact, in a recent trading update, management now expects operating profits for the first six months of its 2023 fiscal year ending in April to be at least £400m. That’s 45% higher than last year!

It seems being the largest supplier of cardboard in Europe has granted it sufficient pricing power to not only mitigate the impact of cost inflation but like-for-like sales volume as well. And with cash flows set to boom, the dividend yield could be on track to do the same.

Even FTSE 100 shares have risks

While being a member of the largest 100 publicly traded businesses on the London Stock Exchange suggests stability, that doesn’t mean DS Smith is a risk-free investment.

According to its 2022 full-year results, input costs increased by a whopping £1.21bn, primarily from rising raw material and energy prices.

The cost-of-living crisis here in the UK isn’t only affecting consumers. Energy-intensive companies like DS Smith are also suffering. And should electricity prices continue to climb from here, it’s unclear whether the firm can continue offsetting the impact.

After all, as electricity and heating bills increase for households, less money is available for discretionary online spending. A continued decline in order volumes means lower demand, resulting in fewer revenue opportunities for DS Smith. So even if management has some remaining pricing power to exercise, it may not be enough to offset the reduced sales volumes.

Despite this risk, these FTSE 100 shares are still a worthwhile investment, in my opinion. Yes, the coming months are filled with uncertainty. However, the long-term strategy remains intact. And with e-commerce unlikely to disappear anytime soon, demand for cardboard will likely stick around as well, opening the door to a reliable dividend income for patient investors.

The post £500 to invest? A 5%-yielding FTSE 100 gem I’d buy shares in right now appeared first on The Motley Fool UK.

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Zaven Boyrazian 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.

Motley Fool UK 2022