BAE Systems isn’t the only FTSE 100 stock I’d consider buying for sustainable passive income

There are many ways to build up your initial capital in the stock market. One that I think deserves more attention is to buy stocks for the passive income they generate. This money can then be reinvested, allowing the compounding to work its magic over time.

Strong and stable

In my opinion, a good income stock is one that returns more money to its owners each year (or so), even if the actual dividend yield is relatively low. I much prefer that to larger but more irregular cash payments, especially if the underlying business is also growing.

BAE Systems (LSE: BA.) is a good example. This blue chip giant has been increasing its dividends for decades.

Based on recent events, I can see this trend continuing. Due to the terrible conflicts in Ukraine and Gaza, the £39 billion cap is in something of a period of declining benefits as governments ramp up their defence spending. Indeed, new Prime Minister Keir Starmer has said that the UK has a “cast iron commitment“to devote 2.5% of national income to defense.

In his own words: “The defense and security of the nation… are the government’s first priority.”

It’s all in the price?

My only concern right now is that the valuation – at 19 times forward earnings – is excessive. This price is not surprising. The shares are up 42% in the last 12 months alone. But it does suggest that there is plenty of good news to come.

If the results are slightly disappointing, some of these gains could be given up. We have actually seen a slight pullback over the past month, perhaps as traders look to move on.

That doesn’t mean BAE’s 2.5% yield is in danger. In fact, this year’s dividend is expected to be covered more than twice by earnings. That’s a good margin of safety, even if revenue and earnings come in slightly below expectations.

However, I still think it makes sense to own a selection of income-producing stocks rather than just one.

Boring but beautiful

FTSE 100 peer Bunzl (LSE:BNZL) is another stock I would consider buying for sustainable passive income.

The story continues

As I said before, the “sustainable” dimension is important. I want to be sure that this money will arrive, even if it means that I will not get a higher return.

The truth is, no dividend stream is ever guaranteed. Investing just doesn’t work that way! But I’d bet that this international distributor will be one of the last stable income stocks.

Bunzl specializes in transporting goods from A to B. These items are extremely boring: think food storage containers, safety boots and hygiene products. They are also essential for the functioning of businesses and services.

This partly explains why the company has been able to increase its dividends year after year, even during the pandemic.

Just the beginning

Again, one of the downsides is valuation. A forward P/E ratio of 17 is high relative to other companies in the industrials sector, and there’s always a risk that I’m paying too much. That might explain why the share price — but not the dividend stream — has been a bit volatile in recent years.

For this reason, I would not stop looking for passive income stocks if I had the funds to buy BAE and Bunzl as the basis of my long-term focused portfolio.

The article BAE Systems isn’t the only FTSE 100 stock I’d consider buying for sustainable passive income appeared first on The Motley Fool UK.

Further reading

Paul Summers has no position in any of the stocks mentioned. The Motley Fool UK has recommended BAE Systems and Bunzl Plc. The views expressed on the companies mentioned in this article are those of the author and 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 broad range of ideas makes us better investors.

Motley Fool UK 2024