Despite capital gains being the main motivator for all of my investments, I’m still a big fan of dividends. Two shares I hold which are serving me well on this front are BAE Systems plc (LON: BA) (LSE: BA.L) and British American Tobacco plc (LON: BATS) (LSE: BATS.L).
BAE is undergoing a difficult time of it at the moment. The world’s defence industry has been hurt by cutbacks in military spend across the developed world, with US sequestration dampening demand for products from the world’s largest spender on military items. I’m not too concerned about this though, because the US economy is picking up and I think that in the long run defence spending from the US as well as developing nations such as China and India will be very buoyant.
Regarding its dividend, BAE presently yields 4.5%. This is not a particularly high yield at the moment, given that some UK shares yield 6% plus at the time of writing. But I’m comfortable with it because I feel that it’s very sustainable and that its rate of growth will beat inflation over the long run. Part of the reason for this is the fact that BAE has a payout ratio of just 55% or so, which indicates adequate headroom to raise dividends at an appealing rate for income investors like me over the coming years.
British American Tobacco
While the tobacco industry is more stable than the defence space, it too is facing some difficulties. Cigarette volumes keep on tumbling and there is seemingly no end on this front. A combination of smuggling and a switch to e-cigarettes are two factors which could be behind this. As I mentioned in my article on Imperial Tobacco (now Imperial Brands), I’m bullish on the prospect of further product development within the smokeless tobacco space and I think that British American Tobacco could be a good buy with dividends put to one side.
However, taking them into account only enhances the investment case in my opinion. That’s because British American Tobacco yields 4.4% and in the last five years has increased dividends per share by almost 30%. This indicates to me that further dividend growth could be on the cards, with British American Tobacco’s payout ratio of 74% being somewhat modest in my view for what could be described as a quasi-utility stock. Therefore, as with BAE, I think that there is the potential for British American Tobacco to beat inflation when it comes to growth in dividends.
Undoubtedly, UK interest rates are making it increasingly difficult for savers. I’m feeling the pain on that front, so it’s a real positive for me to hold shares like BAE and British American Tobacco which have the capacity to boost my income while I barely get 2% gross from my fixed rate bonds at various bank accounts.
Anyway, let me know what you think of British American Tobacco, BAE and dividends in general…
The author owns shares in BAE, British American Tobacco and Imperial Brands at the time of writing.