BAE Systems (LSE:BA.) is one of the FTSE 100‘s finest dividend growth shares. Shareholder payouts have risen for 22 consecutive years. In the last five years, they’ve grown at an average annual rate of almost 9%.
Strong market conditions for defence firms means City analysts expect more impressive dividend growth. If forecasts are accurate, a £20,000 investment in BAE shares today will provide a £360 passive income in 2026.
Investors can generate a better near-term income with higher-yielding dividend stocks. But over the long term, I think BAE Systems could be a brilliant income share to own.
In great shape
Last year the FTSE firm paid a total dividend of 36.3p per share. Analysts are predicting this will rise to:
- 39.4p in 2026
- 44p in 2027
- 49.9p in 2028
However, dividends are never guaranteed, even for businesses in non-cyclical sectors like defence. So how realistic are these estimates? In my view they’re pretty robust, with expected payouts covered by predicted earnings bang on the safety benchmark of two times.
That provides a margin of error in case, say, costs spiral or supply chain issues hit project delivery, denting earnings. But that’s not the only reason I’m comfortable with current dividend forecasts — BAE’s balance sheet adds another layer of protection. Strong cash flows mean net debt (excluding lease liabilities) to underlying earnings has toppled to 0.9.
That’s not all. Cash flows in the defence sector are about as predictable as they get, underpinned by contracts that typically last years. A huge £84bn order backlog means a substantial portion of revenues and cash flows are already locked in, giving BAE the visibility it needs for reliable dividend growth.
A dividend growth hero
As I said, BAE Systems shares don’t carry the largest dividend yields. These range between 1.8% and 2.2% for the next three years. Yet the possibility of brilliant and sustained dividend growth makes it a passive income share worth serious consideration.
This is because hot dividend growth stocks like this can be more powerful than high-yielding shares. Rising payouts boost passive income, but they can also support healthy share price gains, and help investors stay ahead of inflation.
BAE Systems shares are hot right now as defence budgets climb. The question is, will they remain in high demand and experience further price growth? I’m confident they can, given how low most European countries’ arms stockpiles currently are. With geopolitical uncertainty increasing, this could underpin strong and lasting demand.
One drawback is that the defence sector is highly competitive. And more than in any other industry, product failure could have significant ramifications for future sales. However, I feel BAE’s excellent operational record, expertise across project areas, and iron-clad relationships with major spenders (US and UK) reduces such threats. On balance, I think it’s one of the best dividend stocks to consider for long-term income.
