Wanting to top up your State Pension? I’d buy this FTSE 100 dividend stock

Paul Summers highlights a FTSE 100 (LON:INDEXFTSE:UKX) stock he thinks should be on many soon-to-be retirees’ radars.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Prudent wealth management dictates that a person’s exposure to stocks should reduce as they approach retirement. Since no one wants their hard-earned money to be wiped out by a market crash just when they need it the most, I find it hard to argue with this. That said, I do think it’s worth retaining established, dividend-paying companies as a way of topping up the State Pension.

As things stand, the latter is £168.60 per week for men born on or after 6 April 1951 and women born on or after 6 April 1953. While we all have different needs, I suspect that’s unlikely to be sufficient for a lot of people. 

One example of the sort of stock I’d hold to generate extra income would be defence giant BAE Systems (LSE: BA), even more so following today’s full-year figures. 

“Significant progress”  

At a little over £18.3bn, revenue was up almost 9% on that achieved over 2018 and in line with the firm’s guidance. Operating profit also rose 18% to £1.9bn, motivating CEO Charles Woodburn to say that last year had been one of  significant progress” for the company

Aside from these encouraging numbers, BAE also saw today as an opportunity to comment on how it is tackling its pension deficit — calculated as being £1.9bn last October.

A one-off payment of £1bn would be paid “in the coming months” with another £240m paid-in over the year ending March 2020 and £250m more by 31 March 2021. Although unlikely to make headlines, signs that a company is addressing its obligations always gets a thumbs-up from me. 

Still good value

Taking into account today’s positive reaction from the market, BAE’s shares are 31% more expensive than they were this time last year (compared to the 3% rise in the FTSE 100). Even after such a great run, I still think there’s some value to be had.

Looking ahead, the company has estimated that underlying earnings per share will grow by a mid-single-digit percentage in 2020. This leaves the shares on a forecast price-to-earnings (P/E) multiple of roughly 14.

While not a ‘bargain’ valuation, this doesn’t feel like too much to pay, particularly as this prediction has been made without taking into account any (potentially positive) impact from acquisitions made by the firm in January. BAE also continues to have a strong backlog of orders, now valued at £45.4bn. 

To return to my earlier point, however, I think the shares are worth snapping up primarily for the income they generate. 

Consistent hiker

Today, the company announced that it would pay its owners a final dividend of 13.8p per share. This brings the total cash return for 2019 to 23.2p — 4.5% higher than in the previous year (22.2p) — and gives a trailing yield of 3.5%.

Cementing its status as a consistent dividend hiker, BAE plans to raise the payout once again in 2020. With analysts predicting 24p will be handed back, this would translate to a yield of 3.6% at the current share price. 

Aside from being a decent yield, this payout looks like being covered twice by profits. This suggests BAE is a far safer dividend pick compared to some of its top tier piers.

Defence spending may be unpredictable (and investing in this industry may not be to everyone’s taste) but — seen purely from an income perspective — I continue to believe BAE is a solid choice for retirees. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers 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.

More on Investing Articles

Investing Articles

Down 88% since its peak! Is this one of the best UK shares to buy now?

I see lots of potential shares to buy on the UK stock market right now, but I don't see explosive…

Read more »

Investing Articles

Should investors be looking at the Barclays share price?

The Barclays share price has been in rally mode lately, but is the best still to come for new investors?…

Read more »

Investing Articles

Here’s what Stocks & Shares ISA investors are buying today!

ISA investors are piling into these UK and US stocks. But which could be the best buy right now? Royston…

Read more »

Investing Articles

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing For Beginners

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »

Investing Articles

This FTSE 250 stock looks unmissable — but buying shares now could be a mistake for me!

It’s tough when a stock looks fundamentally sound, but there’s a cloud hanging over it. This is what’s happening with…

Read more »