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No investment is ever entirely risk-free, but some dividend stocks have proven themselves to be pretty reliable sources of passive income over the years. Companies like BAE Systems (LSE:BA.), Diploma, and British American Tobacco have been consistently paying and increasing shareholder payouts for decades.
As such, these three stocks are among some of the most popular British income investments. But will investors continue to enjoy decades worth of future dividend hikes?
Zooming in on BAE
As a leading player in the global defence industry, BAE’s getting a lot of attention from investors right now. Rising geopolitical tensions and new defence spending commitments from European nations are transforming into powerful growth tailwinds. And investors have already started taking notice.
Following its latest results, the group’s order book has surged to a record high of £77.8bn. This is largely thanks to its 2024 performance coming in ahead of expectations, as well as a few key new contracts, such as a $2.5bn deal to supply Sweden and Denmark with new CV90 combat vehicles.
Pairing all this progress with a revenue forecast for 2025 indicating BAE’s top line will surpass £30bn in 2025, it’s not so surprising to see the share price surge by 35% since the start of the year. A higher stock price is welcome news for shareholders. But more importantly, the continued expansion of cash flow and earnings paves the way for larger dividends.
After these latest results, BAE Systems is now sitting on a 21-year streak of continuous dividend hikes with an average payout growth rate of 7.3%.
Defence spending is cyclical
Right now, increased tensions between nations are catalysing larger defence budgets. This is especially prominent among NATO countries now that the US is pushing for less reliance on its military. But as we’ve seen in the past, surges in defence spending eventually wear off as conflicts are resolved.
This pattern’s made perfectly clear when looking at BAE System’s long-term financials. Dividend growth was notably slow in the years prior to the Iraq war. Growth accelerated during the conflict before once again grinding to low single digits after the war ended.
Today, growth has re-entered double-digit territory. However, once the conflicts in Ukraine and Gaza are resolved (hopefully peacefully), the same pattern’s likely to follow once tensions cool. And with shares trading at a price-to-earnings ratio of 25, a slowdown could translate into notable share price volatility.
The bottom line
All things considered, I feel that BAE Systems is worthy of a closer look. And just like BAE, Diploma and British American Tobacco also have impressive track records that make for an interesting investment case. However, they’re not immune to disruption and are far from risk-free.
Prudent capital allocation from their respective management teams has kept the dividends flowing, but there have been plenty of periods where the stock price has suffered. That’s why investors need to carefully examine the risks as well as rewards before committing to an investment decision.
