For investors looking to earn significant passive income, a 7% dividend yield is nothing to write home about. Global producer of paper and packaging Worlds (LSE:MNDI) can boast of just that.

The FTSE100 the company doesn’t necessarily come to mind as the highest dividend stock. However, this company with a market capitalization of £3.6 billion is quietly climbing to the top of the Footsie dividend payout table.

What is happening to Mondi’s share price?

The company’s shares have rallied this year and as I write on October 21, they are trading at £8.20. This is not far from the lowest level in 12 years.

This is an unfortunate combination of factors that have recently influenced the company’s valuation. Revenues were affected by lower pulp prices, which have been degenerating for some time. Demand has also been degenerating since the pandemic.

Add to this higher transport and energy costs and profits will fall. The company is focusing its efforts on cost-cutting and spending containment initiatives, but I believe a stern boost in demand is needed to ensure a long-term sustainable dividend.

The good news for investors is that increased e-commerce activity could be the shot in the arm that stocks need. The demand for packaging is likely to boost in the near future. The company is also positioning itself towards future-proof, sustainability-oriented packaging solutions.

Quotation

Mondi is currently trading at a price to earnings (P/E) ratio of 22 with a dividend yield of approximately 7.2%. This gives a dividend yield almost twice as high as the average Footsie yield, which may be worth considering for income investors despite the recent share price declines.

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

Second, has the stock been oversold despite recent challenges and is it worth buying near 12-year lows?

Risk and reward

I like that the company has a powerful presence in the everyday packaging industry rather than bulky industry. The group’s two-unit structure provides scale across kraft, corrugated and malleable packaging, which I believe helps spread risk across customers and end users.

Income is the clear draw card here. A yield of around 7%, supported by consistent withdrawals and a final periodic payment, may appeal to those building passive income.

Of course, there are risks involved. Demand for packaging is cyclical, so periods of reduced demand and weaker consumer spending can put pressure on profits and dividends. Similarly, cost pressures could reduce margins even if revenues stabilize.

Key conclusions

For passive income, the company’s 7% rate of return is very attractive, and its main markets are related to everyday needs.

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