1 FTSE dividend stock I’d put 100% of my money into for passive income!

If I could invest in just one stock to generate a regular passive income stream, I’d choose this FTSE 100 Dividend Aristocrat.

| More on:

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.

Diversification is the cornerstone of my passive income investment strategy. Since dividends aren’t guaranteed, I spread my stock market positions across a variety of companies and sectors.

Accordingly, I hope to secure a steady flow of dividend payouts even if some firms that I invest in encounter financial difficulties. Ultimately, going all in on a single stock is an extremely risky approach and one that’s too rich for my blood.

Nonetheless, it’s an interesting thought experiment. What if I could only pick one dividend share to buy? Which stock would I feel most comfortable putting all my cash into?

After serious deliberation, I settled on Europe’s largest defence contractor, BAE Systems (LSE:BA.).

Here’s why.

Dividend reliability

Offering just a 2.3% dividend yield, BAE shares might not be an obvious choice for passive income seekers. Indeed, the company’s yield is lower than the average 3.7% yield across FTSE 100 stocks.

But hear my logic out. If I had to concentrate my entire passive income portfolio in a solitary stock, I’d prioritise dividend stability over a high yield that might not be sustainable over the long term.

In that regard, the weapons manufacturer doesn’t disappoint. It’s a Dividend Aristocrat, boasting an unbroken 30-year streak of growing shareholder distributions.

Most recently, the firm hiked its full-year dividend for 2023 by 11% to 30p. In addition, BAE continues to boost shareholder returns via an ongoing £1.5bn share buyback programme.

Looking ahead, forecast dividend cover looks healthy at 2.1 times earnings. That’s above the two times threshold generally seen as indicating a wide margin of safety. Impressive stuff.

Defensive qualities

I also like the non-cyclical nature of the company’s operations. Many dividend shares rise and fall in accordance with macroeconomic cycles, but BAE’s fortunes are more closely linked to military expenditure by its government clients around the world.

This makes the stock particularly attractive currently, considering the UK economy entered a recession at the end of 2023.

Granted, some investors may have moral concerns about a business that specialises in manufacturing fighter planes, missiles, warships, and munitions.

That’s understandable. However, there’s little denying this sector’s booming at present due to elevated geopolitical risks and the tragic ongoing wars in Ukraine and the Middle East.

Perhaps then it’s unsurprising that the BAE share price has grown 157% over five years. Looking ahead, the firm’s future looks bright too.

Impressive recent contract wins, such as a £4bn order under the AUKUS defence pact for a new generation of nuclear submarines, lifted 2023’s order intake to a record £37.7bn. BAE’s order backlog also stands at an unprecedented high of £69.8bn.

Risks

Despite reasons for optimism, it’s worth noting the company’s forward price-to-earnings (P/E) ratio of 19.4 is higher than its historical average. This might indicate lower future returns.

Furthermore, BAE’s no stranger to controversy. The historic corruption scandal over the Al-Yamamah arms deal with Saudi Arabia springs to mind.

Plus, Indian authorities are currently investigating allegations of “criminal conspiracy” against BAE and Rolls-Royce relating to the procurement of Hawk 115 advanced jet trainers in 2005.

Nevertheless, I believe BAE Systems merits consideration for any investor’s passive income portfolio. It’s right at the top of my own list, but I’d diversify to mitigate the risks.

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.

Charlie Carman has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »