Big dividends. That's what I want. Big dividends that only get bigger. And in the world of big, growing dividends, they don't get much bigger than BAE Systems (LON:BA.). This giant defence contractor really fits the bill when it comes to a big, solid income that's likely to just get bigger (have I used the word 'big' enough yet?). It's big (okay, okay, I won't do it again), financially robust, has a long history, a steadily growing dividend and is internationally diverse. What more could you want? Oh, and thanks to Mr Market's panic it's currently yielding over 7%. I'll wait while you get up off the floor.
Better than the FTSE 100
So, what makes this such an attractive proposition? Apart from the fact that there's a 7% cash payout, it's a reliable payout. There is no significant risk of it being cut or stopped. Many professional analysts seem to think that the divvy's going to keep growing at 6-7% a year. A 7% yield, growing at 7%, what's not to like? Let's take a look in more detail, using my un-famous technique of comparing any potential investment to an investment in the FTSE 100. That's a useful thing to do since you can invest in 'the market' for low cost and very low effort. Just sit back, re-invest the dividend and get rich slowly.
How does BAE stack up? Here's a table to go over it all, step by step:
| Factor | FTSE 100 | BAE Systems |
| Earnings yield | 12% | 16% |
| Dividend yield | 4% | 7% |
| Historic earnings growth rate | 7% | 12% |
| Return on retained earnings | 10% | 15% |
| Possible future growth rate | 5% | 8% |
The numbers in this table are from various sources and are guideline figures. They are also rounded to the nearest whole % point since more accuracy might indicate a degree of knowledge about the future that is not realistic.
In each case, BAE has the upper hand. At the current price it's yielding more dividends and earnings. It has historically grown faster (although the fall in the pound in the last few years may have skewed this figure upwards, but currency speculation is just that, speculation). It has been able to generate a higher rate of return on that part of your earnings which are retained within. Finally,…
