When it comes to generating passive income from dividend stocks in the UK stock market, I’ve long been impressed by defence giant BAE Systems (LSE: BA.). And based on recent trading, I can’t see this opinion changing for a while.
Winning stock
To say that business has been good over the last couple of years is putting it mildly.
Capitalising on a desire to bolster their defences, the arms maker has been signing contracts with multiple governments. Sales rose 13% to £13.4bn in the six months to the end of June. The order backlog hit £74.1bn.
These numbers make me optimistic that this company will continue its stellar record when it comes to returning more cash to its shareholders every year. As things stand, analysts are predicting a total dividend of 32.3p per share for FY24. If this came to pass, it would represent a 7.5% rise on that dished out in FY23.
We won’t know the exact figure until BAE full-year results are revealed next February. However, we do know that 12.4p per share was awarded at the half-year stage. This is up for grabs until 24 October when the shares go ex-dividend.
Share price fall incoming?
BAE may stumble eventually. While trading might be very healthy as things stand, defence spending by governments can be fairly lumpy, even if the threat from bad actors remains ever-present.
Any hint that the purple patch might be ending — perhaps prompted by a longed-for ceasefire between Ukraine and Russia — could push traders to take profit. Having rocketed over 25% in the last 12 months alone, the shares already change hands at 19 times forecast earnings.
So, while I continue to rate BAE Systems income credentials highly, I also think a lot of good news is priced in.
Chunky dividend yield
Another income stock going ex-dividend a little earlier next month — 10 October — is housebuilder Taylor Wimpey (LSE: TW).
Based on projections, the shares yield a meaty 5.5% at the current share price. That’s not quite the largest payout in the index, but it’s about 2% higher than the average. It’s also a lot more than over at BAE Systems (2.5%). Is it too good to be true?
Well, it’s no secret that anything related to property has found things tough in the last few years. High interest rates (relative to what we’ve had since the Great Financial Crisis) and a cost-of-living crisis conspired to reduce to demand from buyers.
In spite of this, Taylor Wimpey’s dividend has held steady. Whether this situation can continue for much longer is open to debate. This year’s total payout isn’t set to be covered by profit. But recent data suggests investors shouldn’t necessarily panic.
Green shoots
British house prices increased by 2.2% in July — the fifth monthly increase in a row. I’d also be surprised if there hasn’t been an uptick in demand following the Bank Of England’s decision to finally begin lowering interest rates.
So, will I be buying? Actually, no. As much as I like this stock, I’m already invested (and enjoying a lovely gain) with sector peer Persimmon. Having too many eggs in one basket is asking for trouble.
However, I will definitely be paying attention to Taylor Wimpey’s next trading update when it drops on 7 November.
