Defence contractors like BAE Systems (LSE:BA.) often prove to be great dividend shares to hold over the long term. This particular FTSE 100 operator has grown its annual dividend every year since 2012.
It’s long record of payout growth reflects BAE’s market-leading position and the resilient nature of defence spending. Demand for weaponry and related hardware remains broadly stable regardless of broader economic conditions.
In fact, the outlook for defence spending is stronger now than it has been for decades. And so holders of the Footsie company can realistically expect dividends to keep growing as sales (likely) strengthen, at least over the near term.
Further growth expected
My optimistic take is shared by City analysts. As the table below shows, dividends on BAE Systems shares are tipped to keep rising through to the end of 2026:
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 35.92p | 9% | 2.2% |
| 2026 | 39.50p | 10% | 2.5% |
Encouragingly for investors, these dividend projections are well covered by expected earnings over the period, too. So even if profits are blown off course — for instance, by supply chain issues or project delivery problems — the company could still be in good shape to meet broker forecasts.
Dividend cover rings in at 2.1 times for each of the next two years, beating the widely regarded minimum level of 2 times that investors crave. This should give the company the flexibility to meet payout forecasts while also continuing to invest for growth.
Strong foundations
That’s not to say I’m expecting profits to disappoint over the next couple of years. BAE Systems’ sales and operating profit rose 14% and 4%, respectively, in 2024, to £26.3bn and £2.7bn.
With a strong order book — the company’s order backlog rose £8bn last year, to £77.8bn — the business has strong earnings visibility over the period too.
On top of this, the FTSE 100 company has considerable financial resources it can call upon to grow dividends in line with forecasts. Free cash flow remains strong and was an impressive £2.5bn in 2025, helped by strong customer advances and impressive operational cash conversion.
BAE’s £1.5bn share buyback programme (due to complete in 2026) underlines the robustness of its balance sheet.
A top buy?
BAE Systems’ soaring share price has had a negative impact upon the company’s forward dividend yields. For the next two years they sit some way below the FTSE 100 forward average of 3.5%.
Still, I believe the prospect of rapid, inflation-beating payout growth in the years ahead makes the stock worth serious consideration for passive income.
There are hazards the company may face further down the line. Particularly troubling is the prospect that US defence spending will fall under President Trump’s efficiency drive. The US is the company’s largest single market.
But on balance, I think BAE Systems shares are an extremely attractive option for both growth and dividend investors, supported by surging defence spending by non-US NATO countries.
