7% dividend yield! Are passive income investors sleeping on this top stock?

For investors looking to build a sizeable passive income, a 7% dividend yield is nothing to sneeze at. Global paper and packaging company Mondi (LSE:MNDI) boasts exactly that.

The FTSE 100 company doesn’t necessarily spring to mind as a top dividend stock. However, this £3.6bn market cap company has quietly been climbing toward the top of the Footsie dividend payout tables.

What’s happening to the Mondi share price?

The company’s shares have drifted this year and are sitting at £8.20 as I write on 21 October. This isn’t far from a 12-year low.

It’s been an unfortunate combination of factors that have hit the company’s valuation in recent times. Revenue has been hit by lower pulp prices, which have been in long-term decline. Demand has also been falling since the pandemic.

Combine that with higher transport and energy costs, and profits have slumped. The company is focusing its efforts on cost-cutting initiatives and pausing expenditure, but I think it needs to see a serious pick up in demand to deliver a long-term stable dividend.

The good news for investors is that increasing e-commerce activity could be the shot in the arm the stock needs. Demand for packaging is likely to increase in the near future. The company is also positioning itself towards sustainability-focused packaging solutions for the future.

Valuation

Mondi currently trades on a trailing price-to-earnings (P/E) ratio of 22 with a dividend yield around 7.2%. That gives it nearly double the Footsie average dividend yield, which could be worth considering for income investors despite the recent share price declines.

I think there are two key questions that investors should answer before considering buying Mondi shares. First, are the long-term trends and business positioning supportive of growing revenues and profitability?

And second, despite recent challenges, have the company’s shares been oversold and are worth picking up near a 12-year low?

Risk and reward

I like that the company has a strong foothold in everyday packaging rather than heavy industry. The group’s two-unit structure provides scale across kraft paper, corrugated solutions, and flexible packaging, which I think helps to spread risk across customers and end uses.

Income is a clear drawcard here. A yield north of 7%, supported by consistent distributions and the latest interim payment, could appeal to those building a passive income.

Of course, there are risks involved. Packaging demand is cyclical, so periods of reduced demand and weaker consumer spending can put pressure on profits and dividends. Similarly, cost pressures can eat away at margins even if revenues stabilise.

Key takeaways

For passive income, the company’s yield of 7% is very appealing and its core markets are tied to everyday needs.

However, given the current earnings outlook and P/E ratio, I think there are better options for passive income investors than Mondi at present.

The post 7% dividend yield! Are passive income investors sleeping on this top stock? appeared first on The Motley Fool UK.

More reading

• 10,000 shares in this unheralded FTSE 100 stock paid £6,110 last year
• To target a £1,500 monthly passive income, I’d need this much in a SIPP…
• The Mondi share price crumples 14% after a disappointing trading update!
• How much do you need in an ISA to target a £1,300 monthly passive income?
• 3 mega-cheap FTSE 100 shares that demand attention in October

Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

See author's posts