Key Points
- Acquiring passive income stocks can be a great way to build wealth
- There are plenty of opportunities for income in the FTSE 100
- This Fool thinks these two companies have unique qualities as income investments
I am always looking for passive income stocks to add to my portfolio. Income stocks can be a great way to build wealth and generate higher returns in the long term.
However, not all income stocks are created equal. Some companies have better prospects than others.
These are my two favourite income stocks in the FTSE 100 right now, considering their income and dividend growth potential.
Passive income stocks to buy
The first enterprise on my list is the defence contractor BAE Systems (LSE: BA). What I like about this company is the fact its contracts are usually multi-year agreements with major governments. This provides a high level of visibility and predictability for the group.
It also suggests that the firm’s dividend to investors is more secure than most. With its long, secure contracts, BAE can plan out its cash commitment years in advance and set the dividend at an appropriate level.
At the time of writing, the stock supports a dividend yield of 3.7%. This might not be the highest yield on the market, but I think its security more than makes up for the lack of income.
As BAE operates in a highly regulated industry, it does face some unique risks. These include lawsuits related to its products, which could force some hefty legal fees and challenges on the business. There are also some ESG considerations, such as the risks of investing in the defence industry.
FTSE 100 leader
As the e-commerce market has boomed, demand for paper and packaging products has also rocketed. Companies that service this market have been reporting explosive growth, including FTSE 100 corporation DS Smith (LSE: SMDS).
This is one of the largest sustainable paper-based packaging companies in the world. It even has its own forests to produce the pulp needed to manufacture paper products.
This vertical integration, coupled with growth in the broader packing market, has helped the business increase sales by nearly 70% over the past six years. According to City analysts, profits could hit £412m this year, compared to £167m in 2016.
With profits set to expand further in the years ahead, the company will have more headroom to increase its distribution to investors. According to analysts, the dividend payout could increase by 20% in the current financial year and a further 13% in fiscal 2023. This would leave the stock yielding 3.7%.
Based on this growth and the outlook for the global e-commerce market, I think the stock would make a fantastic addition to my passive income portfolio.
Challenges the company could face include rising labour and materials costs, which may hit profit margins. The group could also face pressure to improve the sustainability of its products as part of the global EGS movement.
