I’m a couple of decades off retirement currently so I’m not targeting a passive income just yet. Therefore, my portfolio is more focused on growth shares. However, I believe there is a place in every portfolio for some solid and defensive FTSE 100 dividend income shares.
In the current environment it is increasingly difficult to find safe, reliable dividends. But I believe the two shares below offer exactly that and would be perfect to generate a passive income in retirement.
A FTSE 100 stalwart
FTSE 100 giant BAE Systems (LSE: BA) is quite literally defensive by nature and in operation. The company makes fighter planes, radar, attack missiles, warships and munitions. It is also increasingly moving into the growth area of cybersecurity.
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Ethically, the defence goliath might not be everyone’s cup of tea. But its revenues are largely government backed. Its contracts are usually long term. And the firm is a trusted partner of many governments around the world. This is crucially important when dealing with intellectual property or state cybersecurity.
These factors translate to a reliable and stable income stream. While not immune to the effects of coronavirus (interim operating profits declined 10% year-on-year), the deferred final dividend from 2019 has been reinstated. A 9.4p interim dividend for H1 2020 has also been announced.
The dividend per share has been edging higher from 20.9p in 2015 to 23.2p last year. This equates to a dividend of around 4.4%. There is also ample dividend cover of around two times.
In my view, at a price-to-earnings ratio of 12, BAE Systems is a great share to own for a growing passive income. I also think there is some share price growth to come as well. The company is currently over 20% off its year-high share price.
A share I’d buy for retirement
Another share I’d buy for a passive income in retirement from the FTSE 100 is National Grid (LSE: NG.) The company owns and operates the electricity and gas infrastructure across the UK and in north-eastern America.
Unlike utility providers, National Grid has a monopoly. Given people always need electricity regardless of how the economy is performing, this means it has very reliable revenue streams.
The firm increased its dividend payment by 2.6% this year in line with its policy to grow the payout by inflation (or more). At the time of writing, the dividend is 5.6%. This is a significantly higher passive income than the 1% you can get from a savings account.
However, the company is not without problems. Dividend cover is low, although this is less concerning with such reliable revenue. It also took a £400m hit to profits due to rising coronavirus costs and bad debt, particularly from US customers. But National Grid says these declines are largely recoverable.
Most worrying is the ongoing regulation by Ofgem. It recently proposed an overhaul of the energy network that could severely limit the profit National Grid can make. However, it is worth noting that the UK accounts for only 45% of group profits.
Overall, I’m much more bullish about BAE Systems. National Grid is a bit more expensive (trailing P/E of 16) and I foresee road bumps ahead. However, were I a retiree today, I would be tempted to buy both FTSE 100 companies for a reliable passive income.
