With the FTSE 100 having a dividend yield of 4.3%, now could be a good time to consider income shares. After all, the rate of inflation is persistently above the Bank of England’s 2% target, and interest rate rises are due to be modest over the next few years. As such, income shares could offer a relatively impressive return profile in the coming years.
With the BAE (LSE: BA) share price having fallen in recent months, it now has an increasingly attractive dividend yield. However, it’s not the only FTSE 100 dividend share that could be worth buying now for the long term, in my opinion.
British American Tobacco (LSE: BATS) has become an increasingly unpopular share in a sector that fewer investors are bullish about. The stock has declined in price by 46% in the last year. For a company that has a long track record of stable financial and operational performance, as well as defensive characteristics, that is an exceptionally disappointing performance.
Of course, the future for tobacco seems to be highly challenging. Increased regulations in a range of countries around the world, coupled with changing consumer tastes, are causing cigarette volumes to decline. This trend is showing little sign of slowing, and could impact on the wider industry over the next few years.
However, with British American Tobacco having significant pricing power, it could offset falling volumes with higher prices. It also has a strong position in the e-cigarette segment, while it is investing heavily in reduced-risk products. Therefore, with it offering a dividend yield of around 7.4%, it appears to be a highly appealing income investing opportunity for the long run.
BAE is also a relatively unpopular share at the present time. Its stock price has fallen by 25% since mid-July, with concerns surrounding Saudi Arabia likely to be the main reason for this. As a major customer of the company, the mere possibility of sanctions against the country could cause significant disruption. And with wider concerns about the world economy continuing to dominate investor thoughts, the stock faces a challenging near-term period.
However, with it now having a dividend yield of 4.5% which is covered 1.9 times by profit, the stock appears to have improving income potential. The defence sector’s growth potential could help to boost its dividend growth rate in future. With GDP growth across the developed and developing world being strong at the present time, spending on defence could increase significantly. After a period of restricted growth, this may provide a tailwind for the company over the long run.
Of course, BAE may experience further uncertainty in the near term. However, with its bottom line forecast to rise by around 8% next year and it appearing to have a margin of safety as represented by a relatively high dividend yield, its long-term investment potential appears to be impressive relative to the wider FTSE 100.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Peter Stephens owns shares of BAE Systems and British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. 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.