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He FTSE 100 It continues to flirt with its all-time high of 7,903.50 points, set in 2018. Despite this elevated level though, I think the UK blue chip index still offers great value. It contains many stocks that I believe have the potential to pay me regular and reliable passive income.
Here’s one of the top FTSE 100 stalwarts who looks like a solid candidate for my portfolio at the moment.
the best performer
defense contractor BAE systems (LSE: BA.) was the highest performing FTSE 100 stock in 2022. It delivered an outstanding return of 55%. This increase was triggered by Russia’s invasion of Ukraine, which caused a massive increase in demand for the company’s military hardware offerings.
Despite this increase, however, the stock is still showing a healthy dividend yield of 3.1%. Sure, that’s below the FTSE 100 average return of 3.5%. But the company is in a very strong financial position to continue to increase its dividend from here. It has more than £2bn in cash on the balance sheet and a bulging order book.
The company’s total pay this year is expected to be 26.5 pence per share. Better still, the dividend is expected to rise to 28.3p next year. That would give you a 3.4% yield, as it stands.
In fact, I expect the company’s dividend to increase for many years to come based on its growing order book. These defense contracts naturally span many years, giving management great visibility into future earnings.
Risk
Of course, that’s not to say that the dividend can’t be cut unexpectedly. In fact, that’s what happened in 2020 when the pandemic caused the defense giant to postpone its dividend. Another Covid outbreak could similarly disrupt your operations again.
However, BAE Systems has increased its dividend payout nine times in the last 10 years. And it can afford to keep doing so, since next year’s expected dividend is covered by double expected earnings.
So the payout seems safe to me, making this defense action a great option to pump money into a growing stream of passive income.
£500 a year in passive income
A BAE share is 849p, as I write. That means you would need roughly 1,900 shares to generate £500 a year in passive income. That would cost me around £16,100.
Now obviously that is a considerable amount of money. I can’t shell out that kind of cash right away. But that doesn’t mean I can’t buy a few shares a week and slowly get closer to that number.
For example, if I buy nine BAE shares every seven days, that would cost me £76 a week (as it stands). That is obviously much more affordable. And if you did that consistently every week for a year, you’d end up with 468 shares. They would pay me £125 a year.
After a little over four years, I would have around 1900 shares, giving me over £500 in annual passive income. If the company increases its dividend, my passive income would increase.
Of course, the stock price will not stop. There will be the natural up and down swings of the stock market. But drip feeding my money every week would smooth out these bumps.
As always, the main ingredients for this would be time, patience and perseverance.
