In the past, I have taken a fairly simplistic approach to finding income-generating opportunities within the market. This often involves picking shares with the highest dividend yields and then holding for years at a time. The hope is that these gains will steadily compound.

However, this has not always been the best approach, as share price falls can sometimes erode passive income. I now try to find shares that are already low priced.

My new approach

My new focus is on finding high-quality companies that have also suffered a fall in share price. This may mean they are less likely to experience further declines. For me, a high-quality company is one with steady earnings growth, the potential to generate significant free cash flow, and low levels of debt.

I am also looking for shares whose yield is forecast to grow considerably in the next year. This will amplify the compounding effect of the dividend. If a company can continually increase its dividend year on year, it can steadily boost my monthly passive income without any changes to my investment strategy.

For that reason, I have been looking at Mondi (LSE: MNDI), a company that produces packaging and paper products. The share has suffered considerably over the last year. The price is down over 17% in 2022 and down 26.5% from its peak in 2021. As a result, it is now trading at a price-to-earnings (P/E) ratio of 11.3. It is forecast to reach just 8.9 by next year.

Dividend potential

Mondi is tempting as it offers a yield of 3.6% and has paid a dividend consistently for the last 15 years. It also has a dividend cover ratio of 2.4, indicating that it can comfortably continue to pay this dividend from its earnings per share (EPS). This level of cover is a good indicator of the company’s underlying fundamentals.

However, it’s important to note that the dividend level has fallen following weaker performance compared to pre-pandemic levels. The company’s turnover and profits are still below 2019 levels, despite a significant rebound from the 2020 financial year. It will be important to watch these fundamentals, as the company’s underlying performance needs to recover fully for the dividend to keep growing.

I think Mondi presents a good passive income opportunity for my portfolio, as it provides a consistent dividend yield in a company with strong underlying fundamentals. However, I would like to wait until the beginning of 2023 before adding the share to my portfolio.

Packaging and paper

Mondi is a packaging and paper business based in the UK. Its paper division manufactures and sells paper for a variety of use, while its packaging business provides packaging solutions in many forms for businesses. Mondi has a global presence and is supported by approximately 26,000 employees.

So what’s the current state of play with Mondi shares? Well, as I write, they’re trading for 1,405p. At this time last year, the stock was trading for 1,707p. This equates to a 17% decline over a 12-month period.

A FTSE 100 stock with risks to consider

Like many businesses, Mondi has suffered due to macroeconomic headwinds and economic volatility. Soaring inflation has led to a rise in the cost of raw materials. There is also still a global supply chain crisis. Both of these issues could impact Mondi’s performance and levels of return. Rising costs of materials could eat into its profit margin. Supply chain issues could result in day-to-day operations and manufacturing being affected, which could impact the delivery and sales of its products.

The unfortunate events in Ukraine have impacted Mondi too. This is because it normally makes approximately 20% of its revenue in Russia. There is no telling how long the current geopolitical tensions will last. This is a risk I will keep a close eye on.

The investment case and what I’m doing now

Let’s look at the bull case of Mondi shares. To start with, I believe Mondi’s profile and presence is a factor that can benefit its growth, performance, and level of return. It is a global business with access to many markets. This can help offset issues in some markets, for example the current issues with Russia.

Moving on, Mondi is in a great position to benefit from the e-commerce boom as many businesses require packaging solutions for the products they sell via online channels. Online adoption and e-comerce is only set to grow too.

Looking at other fundamentals, Mondi shares would boost my passive income stream through dividend payments. The current dividend yield stands at just over 4%. This is slightly higher than the FTSE 100 average of 3%-4%. I am aware that dividends can be cancelled, however.

Last but not least, Mondi has a good track record of performance. I do understand that past performance is not a guarantee of the future. However, looking back, I can see it has recorded consistent revenue and profit for the past four years. Although revenue and profit dipped slightly in 2020 due to the pandemic, I’m buoyed by the fact that 2022 performance has surpassed 2019’s pre-pandemic performance.

To summarise, I believe Mondi may experience some issues in the short term due to current volatility. Longer term, however, I believe it is an excellent stock that could boost my holdings. As a bonus, the shares look good value for money on a price-to-earnings ratio of just eight currently. I would buy Mondi shares.

A safe haven?

Luxury goods can be a safe haven in a recession as wealthy shoppers continue to spend. High-end fashion group Burberry (LSE: BRBY) isn’t the cheapest FTSE 100 stock to buy today, but I think it could be one of the best.

Demand is bouncing back as loyal customers return to the group’s stores after the pandemic. New lines such as the Lola handbag range are said to be performing well.

I admire Burberry’s high profit margins, strong brand and long history. The dividend has not been cut since its 2001 flotation and I think further growth is likely.

I think the main risk with Burberry is that it might fall out of favour with Chinese shoppers, who account for a sizeable chunk of sales. Lockdowns in China have kept stores shut and limit travel, but over the next six months we should find out more.

Burberry shares currently trade on 15 times forecast earnings, with a 3% dividend yield. I see the stock as a long-term buy.

A safe 8% yield?

My next pick has one of the highest dividend yields in the FTSE 100. Housebuilder Barratt Developments (LSE: BDEV) has earned a five-star HBF rating for the last 13 years. Sales have doubled over this period and profits have soared.

Despite this strong record, Barratt’s share price has fallen this year as the market has priced in a recession. As a result, the shares now offer a forecast dividend yield of 8.2%.

How safe is this payout? Barratt’s recent market update for the year to 30 June reported “strong nationwide demand” and a solid order book.

This year’s dividend should be covered twice by earnings and Barratt has plenty of cash.

The problem is that if the housing market is going to slow, it’s only just starting to happen. It’s too soon to know how housebuilders will perform over the next couple of years.

Personally, I don’t expect a major housing crash. I think Barratt’s 8% yield could be safe.

This FTSE 100 stock is recovering

Packaging group Mondi (LSE: MNDI) was hit harder than some rivals by the invasion of Ukraine. The group previously generated about 20% of its earnings in Russia.

Fortunately, the rest of the business is performing well. Mondi has been able to pass higher costs onto customers, protecting its profit margins. The group’s net profit for the first half of 2022 was €536m, just 3% lower than during the final six months of 2021.

Mondi has several characteristics I look for in a dividend stock. It’s highly profitable, generates plenty of cash and has relatively low debt levels. In my view, these factors combine to make the dividend safer than some peers.

The short-term outlook could be uncertain, as a widespread recession could see demand for packaging slump. However, I think these risks are probably priced into the stock. Mondi shares trade on less than 10 times forecast earnings and offer a 4% yield.

Mondi is on my list as a dividend buy.

Recent trading update

There were many positives in the recent half-year Mondi trading update. For example, group revenues increased to €4.5bn, up 37%. This excluded the Russian operations, which are set to be sold in the near future. 

At the same time, the group has dealt exceptionally well with inflationary pressures. Indeed, underlying EBITDA increased 66% year on year to €942m, with very strong margins of 20.9%, up from 17.2% in the same period last year. Basic earnings per share also totalled 148.4 euro cents, up from just 54.4 cents in the prior year. 

The fact that Mondi generates most of its energy needs internally, with biomass sources accounting for around 80% of fuels used in the process, has enabled this resilience. Further, it has also been largely successful in passing on any additional costs to customers. This differentiates Mondi from many other FTSE 100 stocks that have struggled to deal with such pressures. 

The major uncertainty

Despite these excellent results, the Mondi share price still dropped around 5% on the day of the trading update. This was mainly due to one major uncertainty for the company: the Russian business. 

Prior to the Russian invasion of Ukraine, the company generated around 20% of its underlying profits from the Russian entity. However, recognising the group’s corporate values and stakeholder responsibilities, Mondi has decided to sell these operations, and the divestment process is now under way.

Although the assets up for sale amount to around €1.7bn, it’s highly unlikely that the group will receive this price. Therefore, this could lead to asset write-downs in the future and a loss of future earnings. 

Why am I still buying this FTSE 100 stock?

Although the disposal of its Russian operations leads to large amounts of uncertainty, I feel that the rest of the business is still extremely strong. The recent half-year update demonstrated this fact. 

Further, there are many signs that this stock is now a bargain. It has a current price-to-earnings ratio of around 6, implying a major bargain. And the company recently raised its dividend by 8%, meaning Mondi now has a dividend yield of 4%, higher than in the past. For these reasons, I will continue to add Mondi shares to my portfolio. 

Recent events 

Mondi has been hit recently due to the Russian invasion of Ukraine. This is because Mondi has significant exposure to Russia, where around 20% of its underlying profits have been made over the past three years. Further, the company has now stated that it will rid itself of all its Russian assets. It’s very likely that, amid the current turmoil, these will sell for significantly less than their intrinsic value. They may even prove to be worthless. These uncertainties have resulted in the Mondi share price sinking over 20% since the Russian invasion. It has also fallen 22% in the past year. 

Other factors that have caused the packaging company’s share price to decline include inflationary pressures. These have increased the company’s costs. Further, there’s a fear that e-commerce growth is starting to slow, which could mean lower demand for packaging. 

However, despite these uncertainties, the company continues to perform well. Indeed, in the first quarter of 2022, underlying EBITDA managed to reach €574m, a 63% increase year-on-year. Excluding the Russian operations, underlying EBITDA reached €460m, a 70% year-on-year increase. This demonstrates that the firm isn’t overly dependent on Russia to stay profitable. In the trading update, it also said that “higher average selling prices more than offset continued cost pressures”.  This shows that Mondi is dealing with inflation better than some other FTSE 100 companies. 

Sustainability credentials 

One reason I originally bought Mondi stock during 2020 was because of its sustainability credentials. The firm prides itself on this, stating that its purpose is “to contribute to a better world by making innovative, sustainable packaging and paper solutions”. This is backed up by the figures, as around 78% of Mondi’s revenues are made from products that are recyclable, compostable or reusable. Therefore, it seems the firm should be able to capitalise on society’s demand for sustainable and eco-friendly products. 

What am I doing now? 

When the Mondi share price sank due to the invasion of Ukraine, I used that opportunity to buy some more Mondi shares. Even though the FTSE 100 stock has risen slightly since then, I still believe that Mondi remains in bargain territory. It has a price-to-earnings ratio of around 12, indicating that investors have priced in the current uncertainties. In addition, the firm pays a dividend that yields around 3.5%, and is also covered by more than twice by profits. This makes it one of the most sustainable dividend stocks in the FTSE 100. 

Therefore, I will continue to buy Mondi shares for my portfolio, as I believe that it’s well-positioned for the future.

Is now the right time to be buying shares? The future is always uncertain. But legendary investor Warren Buffett has been splashing out recently, spending $50bn during the first quarter of this year.

My guess is that Buffett expects the global economy to keep moving forward. I do too. By focusing on value stocks, I’m hoping to provide get some protection from inflation and recession risks.

A safe 5%+ dividend yield

My first pick is NatWest Group (LSE: NWG), the UK bank formerly known as Royal Bank of Scotland. NatWest shares have gained 10% over the last year but remain cheap, in my view.

Rising interest rates should help support the bank’s profit margins. Meanwhile, the group’s strong capital position suggests to me that the forecast dividend yield of 5.7% is safe.

A UK recession could cause an increase in bad debts and a slowdown in new lending. That’s a risk. But NatWest has been through a tough turnaround since 2009 and has faced worse problems.

As I write, NatWest shares are trading nearly 20% below their book value, with a forecast price/earnings ratio of nine. With 30% profit growth forecast for 2023, I may buy NatWest for my portfolio.

A bargain healthcare stock?

The second FTSE 100 share I’m looking at is Hikma Pharmaceuticals (LSE: HIK). Unlike larger rivals AstraZeneca and GlaxoSmithKline, many of Hikma’s products are generic drugs. These are cheaper clones of branded products whose patents have expired.

This model means Hikma doesn’t have to take so much risk on new product development. Although the company still has to gain regulatory approval for new medicines, future demand is easier to predict.

One risk with generics is “increased competition”, according to CEO Siggi Olafsson. This could force Hikma to cut its prices, hitting profits.

I think the company should be able to address this risk by expanding its portfolio in areas where it does have differentiated products, such as injectable medicines.

Hikma shares currently trade on just 11 times 2022 forecast earnings, with a 2.5% dividend yield. City analysts expect profits to rise 10% in 2023. Based on these forecasts, the shares look cheap to me.

I’d buy the dip

FTSE 100 packaging group Mondi (LSE: MNDI) saw its share price fall by 20% when Russia invaded Ukraine. The reason for this is that Mondi’s Russian operations have historically generated around 20% of the group’s profits.

My guess is that these profits may be lost forever. But Mondi’s remaining business still looks attractive to me. Analysts’ forecasts suggest the group should be able to maintain its 15% operating profit margin and may still report profit growth this year.

There’s a risk that demand for Mondi’s packaging products could fall if we see a widespread recession. But my impression is that Mondi is a well-run business that will continue to perform well over the long term.

This FTSE 100 share looks good value to me on 10 times forecast earnings. There’s also a useful 4% dividend yield. I’d be happy adding Mondi to my portfolio at this level.

Luxury…on the cheap

Lifestyle brand Burberry (LSE: BRBY) is just one example. Its share price has dropped 15% since the beginning of 2022, leaving the FTSE 100 stock now languishing close to its 52-week low.

This isn’t completely unwarranted. The rise of Covid-19 infections in China isn’t ideal given that this is a key growth market for the business. Although only representing a small proportion of total sales, the Ukraine-Russia conflict has also pushed Burberry to shut its stores in the latter. There’s a risk that things could get worse on both fronts.

As a holder of the stock already, it’s tempting to get frustrated and sell up. Then I remind myself of why I invested in Burberry in the first place. This is a coveted brand with a great history. On a more technical note, the company has long generated great returns on capital — the metric beloved by master investors such as Warren Buffett and Terry Smith. The balance sheet looks healthy and the 3% dividend yield is some compensation for being asked to wait for a recovery.

In sum, I won’t be selling my stake anytime soon. Actually, I think now might already be an excellent opportunity for me to top up.

Whether new CEO Jonathan Akeroyd gets a chance to really put his stamp on the business remains to be seen. Call this wishful thinking but I believe there’s a good chance Burberry will be taken out by a deep-pocketed suitor if its shares continue to lose height.

Tempting valuation

A second FTSE 100 share that looks reasonably priced on paper is, well, paper and packaging firm Mondi (LSE: MNDI). Like Burberry, it’s seen its share price fall considerably in 2022.

Again, this isn’t unjustified. Mondi is pretty exposed to the awful events in Eastern Europe. The company has operated in Russia for decades and relies on the country for a not insignificant proportion of its revenue and earnings. The £7bn cap also runs a paper bag plant in Lviv, Ukraine. Factor in supply chain disruption and rising costs and a 20%+ fall in the shares is understandable. Indeed, some degree of diversification will definitely be required if I were to buy today.

Not dissimilar to rivals Smurfit Kappa and DS Smith, shares in Mondi currently trade at 10 times expected earnings. Sure, there are cheaper stocks lurking in the FTSE 100 but that’s not the point. The key question to ask is whether I’m getting a good deal relative to the quality of the business I’d be buying a stake in and the risks entailed. I think that’s the case here. None of these issues look to be permanent. The demand for packaging from online retailers? That’s here to stay.

So long as I can be patient, I’d be comfortable investing now. Perhaps buying in tranches may be the optimal approach.

A cyber-security firm

Darktrace (LSE: DARK) has had a mixed start to life as a public company. After soaring to around 1,000p, the UK share has since dropped back to under 400p. But after today’s excellent trading update, and some other recent positive developments, the shares have managed to climb back to over 500p. I think they can continue to soar.

Even as a current shareholder, the trading update exceeded my expectations. In fact, revenues in the six months to 31 December 2021 reached over $192m, over a 50% year-on-year increase. Even more impressive was the fact that the company saw an operating profit of over $8m, mainly due to the pandemic-related suppression of some key costs. This is a change from the consistent losses the company has been seeing. While I don’t believe this is a sign of consistent profitability, especially as the costs are likely to return soon, it’s still a promising sign.

Even more promising is the updated forward guidance. For FY22, the company now expects year-on-year revenue growth of over 45%, updated from previous guidance of 43%. The recent acquisition of Cybersprint should also boost revenues in the longer term.

There are a couple of risks that must be pointed out though. For example, it has a high valuation, with a price-to-sales ratio of around 10. This implies that revenue growth is already expected to be very high. Further, share-based compensation is expected to increase over the next year, potentially leading to share dilution.

Despite these risks, the potential of Darktrace certainly seems too strong to ignore. This is a UK share I’ll continue to add to my portfolio.

A packaging UK share

Mondi (LSE: MNDI) is a FTSE 100 share that has delivered consistent growth over the past few years, while also paying a sustainable, and fairly high, dividend. Its recent results also demonstrated its consistent growth.

For example, in 2021, revenues were able to grow 16% year on year to €7.7bn, while operating profits grew 23% to over €1bn. This gives Mondi a price-to-earnings ratio of just 11. Considering that it’s managing to deliver strong growth, this seems very cheap. It also raised its full-year dividend 8%, reaching 65 cents. This equates to a yield of around 4%, far higher than many other UK shares.

Even so, the current conflict between Russia and Ukraine is a severe problem for Mondi, because it has significant operations in both countries. In fact, Russian revenues equate to around 12% of the group’s total. Loss of these revenues would, therefore, have a significant impact on the Mondi share price. As such — and also for the sake of an end to the suffering — I hope that a ceasefire is not too far away.

Despite this risk, Mondi is not a Russian company and will not be targeted by western sanctions on Russia. It should be able to mitigate the impacts of the conflict through its other operations. This is why it remains a stock I’m happy to have in my portfolio.

A top e-commerce stock

Packaging producers like Mondi (LSE: MNDI) are facing mounting bottom-line pressure as paper costs rise. So far this particular FTSE 100 operator has been hugely successful in passing these costs onto customers. But whether or not it can continue to do so without demand falling sharply isn’t guaranteed.

I think this danger could be baked into Mondi’s share price at current levels, however. City analysts currently expect earnings at the business to soar 17% year-on-year in 2022. This leaves it trading on a price-to-earnings growth (PEG) ratio of 0.8, below the bargain benchmark of 1.

I’d buy Mondi because I expect sales of its product to continue soaring as online shopping steadily grows. Analysts at data specialist Smithers think the global packaging market will be worth $1.1trn by 2024. That’s up from the $971bn it was estimated at in 2019. I’m confident Mondi’s drive to increase its range of sustainable packaging products will allow it to win more of this business too.

One more FTSE 100 bargain

I think that ITV’s (LSE: ITV) share price could offer even better value for money today. Analysts expect Britain’s biggest commercial broadcaster to record zero earnings growth in 2022. Yet this still leaves the stock trading on a forward price-to-earnings (P/E) ratio of 7.9 times. Meanwhile ITV also sports a mighty 5.3% dividend yield.

It’s my belief that profits forecasts here might steadily be upgraded as the year progresses, leading to hefty share price gains. The advertising market — which is the lifeblood of commercial broadcasters like ITV — has continued rebounding much more strongly than estimates suggested. A continuation of this trend could well see the FTSE 100 firm follow 2021’s anticipated profits boom.

From a long-term perspective I like ITV because of the huge amounts it’s spending to make its ITV Studios production arm a global heavyweight. I also think the company’s massive investment in its video-on-demand service could pay off handsomely. The number of people using its ITV Hub platform rose to 34.8m in September 2021, up a healthy 8% year-on-year.

Big rewards in store?

ITV might have to row extremely hard to continue taking the fight to US streaming giants like Netflix, Amazon and Disney. These firms are investing huge amounts in programming and technology to win viewers from traditional broadcasters. Total spending on content in 2021 rose 14% year-on-year to $220bn, according to Ampere Analysis, because of the huge sums being forked out by the streamers. And the number is predicted to swell to $230bn this year thanks to the contribution of Netflix et al.

Still, it’s my opinion that these competitive risks are reflected by ITV’s ultra-low share price. Besides, the FTSE 100 firm has proved it has what it takes to churn out popular programming too, from reality TV juggernaut Love Island to drama The Bay. I’d happily buy the business alongside Mondi right now.

A defensive FTSE 100 stock

BAE Systems (LSE: BA) is defensive in both senses of the word. Firstly, it operates in the defence and aerospace industry, and is one of the global market leaders. Secondly, due to several recurring contracts with governments around the world, revenues are fairly secure. This means that it normally holds up quite well in the event of a stock market crash. Even so, the BAE share price has fallen over 6% in the past month, a disappointing end to a year in which it has managed to rise around 8%. I feel this slight dip offers a great time to buy.

Indeed, in the forward guidance offered in the half-year report, things certainly looked positive. For example, the group said that it expected sales growth of 3%-5%, and underlying EBIT growth of around 7%. This has also been forecast based on an exchange rate of $1.35 to £1. However, in recent months, the pound has weakened, and the exchange rate is currently $1.32 to £1. This should benefit BAE, because it earns a significant amount of revenue in US dollars yet reports in British pounds.

I am also tempted by the company’s dividend, which rose another 5% this year. As such, it currently yields close to 5%, far higher than other FTSE 100 stocks. A recent share buyback programme of £500m also demonstrates that it’s in a strong financial position.

As such, although there are the risks of inflation, and the fact that government defence spending is not increasing at a similar rate, I still believe that BAE is well-equipped to deal with these. I may add more BAE shares to my portfolio at its current price.

Paper and packaging company  

Mondi (LSE: MNDI) is another FTSE 100 stock that has dipped recently, falling by around 12% in the past three months. Over the past year, it is up 7%, however. But I still think the stock is too cheap.

Indeed, the company has been performing well this year. This included revenue for the first half of the year rising around 5% to over €3.6bn. Further, in the most recent quarter, underlying EBITDA was up 27% from the previous year, reaching €388m. This signals that there is significant demand for Mondi’s products, which are recognised for their sustainability. So, as e-commerce continues to rise in popularity, I feel that demand will increase further.

There are some risks, however. For example, the company has recently highlighted rising costs due to inflationary pressures. There are also planned maintenance costs for the fourth quarter of 2021, and although these will hopefully benefit Mondi in the long term, this is likely to have a substantial impact on profitability in the short term. Nonetheless, I see these as short-term issues, and I’m generally optimistic. Therefore, I may also add more Mondi shares to my portfolio in the new year.