BAE Systems shares have soared 275% in 5 years – it’s also a secret dividend superstar!

BAE Systems (LSE: BA) shares are renowned for their growth potential, and they’ve certainly delivered on that lately.

Shares in the FTSE 100 defence giant are up a whopping 275% over the last five years, and 40% over 12 months. Having bought the stock last year, I’m thrilled. I got what I was looking for.

I bought BAE Systems for three reasons. First, steady revenue growth. So far, so good. On 7 May, it confirmed a strong start to 2025, with guidance reaffirmed. Management expects revenues to grow by 7% to 9% this year, with underlying earnings per share rising by 8% to 10%.

Rising revenues

Second, its bulging order book. BAE has been picking up contract after contract, and now has an eye-watering £77.8bn of business in the pipeline. That’s up £8bn in a year, offering real financial visibility.

Third, the harsh geopolitical reality. With threats from Russia, China, Iran and North Korea mounting, governments are under pressure to boost defence spending. That’s a grim outlook, but for investors in defence contractors like BAE Systems, it offers long-term support.

I didn’t buy BAE for dividend income. The yield is usually low – today it’s just 1.69% on a trailing basis. That’s tiny compared to the passive income I’m getting from FTSE 100 stocks such as M&G, Phoenix Group Holdings and Taylor Wimpey. They’re paying 8% or 9%.

But high yields don’t always tell the full story. Yields are calculated by dividing the annual dividend per share by the share price. That means if the share price rockets – as BAE’s has – the yield falls.

That can hide a solid history of dividend growth. Which in BAE’s case, is really impressive. The group has lifted its shareholder payout for 21 years in a row. That’s a brilliant track record, putting it among a small handful of elite FTSE companies. I think I can safely call it a dividend superstar.

Income growth

Over the past decade, BAE has increased its dividend at an annual compound rate of 4.88%. That’s decent enough. But over the past five years, its stepped up the pace to an average of 7.31% a year. With free cash flow to exceed £1.1bn this year, it looks well supported.

So while the income might look underwhelming at first glance, the dividend has the potential to compound and grow over time.

Of course, nothing is guaranteed. Dividends can be cut. And with BAE Systems trading at a price-to-earnings ratio of 28.6, the stock doesn’t look cheap. That partly reflects the growing belief that western nations will be forced to rearm. But budgets are tight, and politicians’ promises don’t always come through.

A negotiated settlement in Ukraine could also dent investor confidence. Sadly, that still feels like a distant prospect.

BAE is already one of the FTSE’s most successful long-term growth stocks. That was my main reason for investing. But I’ve come to appreciate its dividend credentials too.

As the world gets more warlike, BAE Systems is worth considering buying today. Not just for growth, but its long-term income potential too.

The post BAE Systems shares have soared 275% in 5 years – it’s also a secret dividend superstar! appeared first on The Motley Fool UK.

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Harvey Jones has positions in BAE Systems, M&g Plc, Phoenix Group Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended BAE Systems and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.