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.
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.
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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.