There’s much, much more to successful income investing than simply picking shares that pay the biggest dividends today. This is why I believe BAE Systems (LSE:BA.) is a top FTSE 100 dividend stock right now.
Yields here are decent for the next couple of years. They sit at 2.9% and 3.1% for 2023 and 2024, respectively. But they still lag behind the FTSE index’s average dividend yield of 3.5%.
But the stable nature of defence spending means BAE Systems has a great record of raising dividends each year. And this means it can be a great stock to buy for long-term passive income.
Dividend growth
Defence of the realm is one of the most important functions of any government. So, even during tough economic periods, the amount spent on weapons remains largely unchanged at all points of the economic cycle.
As a result, companies like BAE Systems have excellent earnings visibility. And this in turn provides them with the confidence to raise dividends year after year.
This particular company, for example, even kept raising shareholder payouts during Covid-19 as many other FTSE businesses either cut, froze, postponed or even cancelled dividends.
Things are looking especially good for the defence sector today. Defence spending by the US, UK and their allies is soaring as concerns over Chinese and Russian foreign policy increase.
Total global arms expenditure hit fresh peaks of $2.24bn last year, data from the Stockholm International Peace Research Institute (SIPRI) shows.
“Continuing to deliver”
As a major supplier to the US and UK militaries BAE Systems is enjoying strong trading right now. At last week’s AGM, chief executive Charles Woodburn said that “in the current elevated global threat environment, we’re continuing to deliver on mission-critical requirements to our customers, and our global presence and diverse portfolio of products and services provide a high visibility for top-line growth, margin expansion and cash generation in the coming years”.
Encouragingly he advised that “order flow on new programmes, renewals and progress on our opportunity pipeline remains strong.”
Woodburn also highlighted the “significant” medium- and long-term benefits of the AUKUS security pact. BAE Systems will play a pivotal role in building the first generation of submarines under the deal.
As well as providing tech to governments in London and Washington, the company also counts Saudi Arabia and Australia as significant customers.
The best FTSE income share?
Yet despite all this, BAE Systems — like any company — can’t be described as a perfect dividend stock. Profits here can suffer if project delays occur or the business misses out on key contracts. This in turn can have consequences for dividend growth.
However, on balance I believe the defence giant is a great company to buy for passive income. I won’t go so far as to call it the FTSE 100’s best income share. This depends on an investor’s own attitude to risk and return. But if I have cash to spare I’ll look to add it to my own shares portfolio soon.
