Prudent wealth management dictates that a person’s exposure to stocks should reduce as they approach retirement. Since no one wants their hard-earned money to be wiped out by a market crash just when they need it the most, I find it hard to argue with this. That said, I do think it’s worth retaining established, dividend-paying companies as a way of topping up the State Pension.
As things stand, the latter is £168.60 per week for men born on or after 6 April 1951 and women born on or after 6 April 1953. While we all have different needs, I suspect that’s unlikely to be sufficient for a lot of people.
One example of the sort of stock I’d hold to generate extra income would be defence giant BAE Systems (LSE: BA), even more so following today’s full-year figures.
At a little over £18.3bn, revenue was up almost 9% on that achieved over 2018 and in line with the firm’s guidance. Operating profit also rose 18% to £1.9bn, motivating CEO Charles Woodburn to say that last year had been one of “significant progress” for the company.
Aside from these encouraging numbers, BAE also saw today as an opportunity to comment on how it is tackling its pension deficit — calculated as being £1.9bn last October.
A one-off payment of £1bn would be paid “in the coming months” with another £240m paid-in over the year ending March 2020 and £250m more by 31 March 2021. Although unlikely to make headlines, signs that a company is addressing its obligations always gets a thumbs-up from me.
Still good value
Taking into account today’s positive reaction from the market, BAE’s shares are 31% more expensive than they were this time last year (compared to the 3% rise in the FTSE 100). Even after such a great run, I still think there’s some value to be had.
Looking ahead, the company has estimated that underlying earnings per share will grow by a mid-single-digit percentage in 2020. This leaves the shares on a forecast price-to-earnings (P/E) multiple of roughly 14.
While not a ‘bargain’ valuation, this doesn’t feel like too much to pay, particularly as this prediction has been made without taking into account any (potentially positive) impact from acquisitions made by the firm in January. BAE also continues to have a strong backlog of orders, now valued at £45.4bn.
To return to my earlier point, however, I think the shares are worth snapping up primarily for the income they generate.
Today, the company announced that it would pay its owners a final dividend of 13.8p per share. This brings the total cash return for 2019 to 23.2p — 4.5% higher than in the previous year (22.2p) — and gives a trailing yield of 3.5%.
Cementing its status as a consistent dividend hiker, BAE plans to raise the payout once again in 2020. With analysts predicting 24p will be handed back, this would translate to a yield of 3.6% at the current share price.
Aside from being a decent yield, this payout looks like being covered twice by profits. This suggests BAE is a far safer dividend pick compared to some of its top tier piers.
Defence spending may be unpredictable (and investing in this industry may not be to everyone’s taste) but — seen purely from an income perspective — I continue to believe BAE is a solid choice for retirees.
Paul Summers has no position in any of the shares mentioned. 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.