Here’s one of my top FTSE 100 dividend stocks to buy now

Its shares may have lagged the index, but Paul Summers reckons this is still one of the best FTSE 100 (INDEXFTSE:UKX) income stocks around.

| 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.

UK money in a Jar on a background

Image source: Getty Images

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.

When it comes to selecting the best dividend stocks to buy in the FTSE 100, I’ve long been a fan of defence giant BAE Systems (LSE: BA). And based on today’s trading update, I don’t think there’s much chance of payouts drying up any time soon. 

In demand

This morning, the company reported that demand for its assorted combat vehicles, weapons and technologies “remains high” and that it continued to boast a robust order book and pipeline of opportunities. Importantly, BAE made no change to its guidance. Sales growth of between 3% and 5% is expected for the full year.

Interestingly, BAE commented that it had managed to avoid “any material impact” on its business from supply chain pressures. I reckon there are quite a few stocks in the FTSE 100 that would love to make such an announcement to shareholders.

Investors may also be encouraged by news that many of BAE’s customers, particularly the US, have made it clear that they plan to increase defence spending. Trading in the Asia Pacific region is also expected to “grow significantly”  and ongoing uncertainty in the Middle East should mean the renewal of existing contracts and other opportunities with clients already on BAE’s books. 

A FTSE 100-beating dividend yield

As good as all this sounds, my main incentive for buying BAE now would be for the aforementioned dividend stream. Today, the £18bn juggernaut confirmed that it would be making an interim payment of 9.9p per share this month. That’s a 5.3% rise on the same payout last year (9.4p). This hits on something I consider vital when selecting stocks for income.

For me, a long record of a business consistently raising its cash returns is preferable to one offering a sky-high yield. More often than not, the latter tends to be unsustainable. By contrast, BAE’s dividends should be healthily covered by profits. As a result, I can be more confident it will actually be paid. 

This is not to say that BAE’s yield is low. As things stand, analysts expect the firm to return a total of 24.6p per share for FY2021. At today’s price, that gives a yield of 4.3%. This is higher than the 3.4% or so I’d get from buying a basic FTSE 100 index tracker. It’s also far better than the woeful 0.67% I’d receive from even the best Cash ISA.

No sure thing

As positive as I am on BAE, it must be highlighted that these dividends are never guaranteed. I’d also need to ponder just how long the company can avoid being affected by global supply chain issues. I don’t see any resolution to this for a while. It’s also abundantly clear that we’re still not at the end of the pandemic just yet.

The longer-term performance of the share price also leaves a lot to be desired. BAE’s stock has climbed 30% over the last 12 months. Even so, it’s still 3% below where it stood five years ago. This is why I always need to consider what I might be giving up by not investing elsewhere in the FTSE 100.

As long as I remain sufficiently diversified and that income stream is maintained, I reckon this remains one of the best dividend stocks for me to buy in the index. Moreover, a valuation of 12 times earnings looks reasonable to me, given the encouraging outlook.

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

Would Warren Buffett buy BP shares, as oil excitement grows?

Warren Buffett is a big investor in the oil business, and BP's performance has been attracting investor attention in results…

Read more »

Cropped shot of an affectionate young couple posing with a bunch of flowers in their kitchen on their anniversary
Investing Articles

Here’s how long-term loyalty to UK shares can lead to dazzling returns!

The most successful UK and US share investors buy shares to hold for the long term, as this report shows.

Read more »

Investing Articles

NatWest has just smashed brokers’ dividend forecasts!

After NatWest delivered a Valentine’s Day surprise to investors, our writer thinks the experts may have to raise their dividend…

Read more »

Investing Articles

The NatWest share price slips in early trading despite positive FY 2024 results. What’s the deal?

The NatWest share price is down slightly this morning after the bank released its final results for 2024. Our writer…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

My Legal & General shares have climbed just 7% — so how come I’m sitting on a 20% gain?

Harvey Jones' trading account is showing only a modest return on his Legal & General Shares, but on drilling down…

Read more »

Investing Articles

Prediction: the BP share price could rise in 2025 (or it might fall!)

Following this week’s release of the energy giant’s 2024 results, our writer reviews the prospects for the BP (LSE:BP.) share…

Read more »

many happy international football fans watching tv
Investing Articles

What’s gone wrong with the FTSE 100’s ‘King of Trainers’?

Feeling the pain of a 28% drop in the JD Sports share price over the past three months, our writer…

Read more »

Investing Articles

Is it too late for investors to consider buying these outstanding FTSE 100 shares?

Stephen Wright wonders whether now's the time to consider buying shares in the FTSE 100’s outstanding companies, despite some high…

Read more »