Here’s how much passive income I’d get if I put £20k into BAE Systems shares

This investor in BAE Systems shares takes a look at why they’ve dropped recently and what dividend yield this dip gives him.

| 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.

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.

BAE Systems (LSE: BA.) shares surged in 2022 following Russia’s shocking invasion of Ukraine. That momentum continued into 2023 as they rose another 29.7%. So far this year, they’re up 15.2%.

However, over the past month, the FTSE 100 defence stock has dipped nearly 9%. One consequence of a falling share price is a rising dividend yield, due to their inverse relationship. And ideally, a higher yield should result in higher passive income if I invest today.

So, how much could I expect to receive from BAE dividends with a twenty grand investment? Let’s find out.

Should you invest £1,000 in BAE Systems right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

See the 6 stocks

Losing altitude

First, I’ll consider why have the shares have dipped. There seem to be a few potential reasons here.

For starters, there may have been profit-taking from some investors after the stock reached a record high of £14 in June. Nothing goes up in a straight line and the stock was due a breather after its incredible run.

Created with Highcharts 11.4.3BAE Systems PriceZoom1M3M6MYTD1Y5Y10YALL11 Jul 201911 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Second, plane maker Airbus released a profit warning in late June, which sank all European aerospace and defence stocks. Rolls-Royce, which is also a sector member, has dipped 6.4% from a recent high.

France’s Airbus is also part of the consortium with BAE and Italy’s Leonardo that build Eurofighter Typhoon jets.

Finally, Donald Trump is leading in the US presidential election polls. He has said he would end the war in Ukraine by January 2025 if elected president in November.

Though he hasn’t set out a plan for how he would achieve this result, it might still be weighing on near-term sentiment for defence stocks. Any sudden reduction in global defence spending is a risk here.

Income potential

BAE shares are forecast to pay out 32.3p per share this year. After the dip, this means the stock carries a forward dividend yield of 2.5%. Next year, the payout is tipped to grow by around 9% to 35.3p per share.

So, if I invested £20k in the stock, I’d expect to receive around £1,060 in income over the next two years.

While no payout is ever set in stone, I’m reassured that BAE is a Dividend Aristocrat. Its order backlog stood at a record £69.8bn at the end of 2023, while the prospective payouts for both 2024 and 2025 are covered more than two times by expected earnings. So I’d be very surprised if this dividend was cancelled.

Should I buy more shares?

Nothing has fundamentally changed to alter the investment case here, in my opinion. In fact, the sad reality is that European rearmament is only just getting started, so I think the company still has years of growth ahead of it.

Meanwhile, the stock is trading at 18.8 times forward earnings, dropping to 16.8 by next year if forecasts have it right. That valuation doesn’t look too stretched. Indeed, it’s around 50% less than European peers.

Looking forward, NATO members have committed to increasing their defence spend to 2%+ of gross domestic product (GDP) each year. Italy, for example, is planning to spend just under €7.5bn over the next 11 years on 24 new Eurofighter jets, while Germany announced in June that it would buy another 20.

I view the pullback as an opportunity and I’m considering buying more shares in July, though not £20k’s worth.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Ben McPoland 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

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »