Charged with the task of buying one FTSE 100 dividend stock to hold for the next decade, I know which company would be on my shopping list.
What makes this dividend stock so great?
Before revealing the identity of my favourite top-tier income provider, it makes sense to briefly say why I selected it.
First and foremost, I wasn’t hunting for the stock with the biggest dividend yield.
While there are certainly exceptions to the rule, a monster payout can be a signal that the market has concerns about how well a company is trading. In such a situation, these concerns can cause investors to sell and the share price to fall. This pushes the yield up, but then there’s a big question mark about whether it will actually be paid.
Call me boring but I’d rather receive an average dividend over a bigger one that never arrives.
Instead of size, I place more importance on whether the company has a great track record of raising dividends over time. Why? Because a trend of hikes suggests this business is great at growing profits over the long term.
And the winner is…
Top of the passive income pops, at least in my opinion, is defence juggernaut BAE Systems (LSE: BA.)
This company satisfies the criteria covered above. Yes, the yield is only 2.5% as things stand. But it’s got an almost faultless history of growing the amount of cash it throws back to its investors.
On top of this, analysts expect this year’s dividend to be covered over twice by earnings. Put another way, there’s a really good chance it will be paid.
In demand
I also think the outlook for dividends from BAE is very positive.
This is one of the biggest players in a sector that simply must continue innovating to ward off bad actors. In fact, ongoing conflicts such as that involving Ukraine and Russia have nudged governments around the world to increase their defence budgets. This has caused BAE’s order book to swell.
The downside to this purple patch is that a lot of growth already looks priced in. The shares currently change hands for almost 20 times FY24 earnings. That’s way above BAE’s average over the last five years (15). Should the company now fail to meet expectations, some of the recent gains could be lost.
This brings me to another important point.
A dose of reality
An exercise like this is just for fun. In reality, relying on just one stock to meet all my passive income needs is courting disaster.
This isn’t empty talk. FTSE 100 peer Burberry has been forced to completely cut its payout in 2024 due to flagging sales. That’s a company with 168 years of trading under its belt.
The best way to reduce this risk is for me to own stakes in a variety of UK businesses. Doing so should offer a degree of protection even if one or two are forced to reassess their dividend policies.
Future buy
Right now, I have a preference for owning growth stocks in my portfolio, hence why I’m not rushing to buy this stock today.
But I can definitely see myself taking a stake in the future if retiring early and living off my investment income became possible.
