If you are looking to create a passive income stream with dividend investments, then I highly recommend buying BAE Systems (LSE: BA) for your portfolio.
In my opinion, there’s plenty to like about this global defence contractor, particularly when it comes to dividends. For a start, the stock supports a dividend yield of 4.3% and for 2019, City analysts estimate the distribution will be covered twice by earnings per share. This implies that even if earnings per share fall by 50%, the company should still be able to maintain its distribution to investors.
I don’t think it is likely earnings will fall 50% any time soon. At the end of 2018, the company’s order book was worth £48.4bn, up an impressive 25% year-on-year following the signing of some substantial contracts during the year. These include what’s been labelled the “biggest maritime defence deal of the decade,” the Hunter Class nine-frigate programme from the Australian government.
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As the company capitalises on these opportunities, analysts believe earnings will jump 25% this year. That’ll leave the stock trading at a forward P/E of 12 according to the City, which looks to me to be a low price for a fast-growing global defence business.
Plenty of cash
Homebuilder Berkeley Group Holdings (LSE: BKG) is another FTSE 100 income stock that I think can help you generate a second income.
Unlike some of its other homebuilding peers, Berkeley doesn’t pay out the majority of its earnings in dividends every year. Instead, the company has adopted a more conservative dividend policy. According to City estimates, the business will distribute around two-thirds of earnings to shareholders this year, giving a still-high dividend yield of 5.2%.
Rather than return all of its earnings to shareholders, the company has been holding cash back to grow profits and strengthen the balance sheet. Income has risen at a compound annual growth rate of 17% during the past six years, and at the end of its last reported fiscal year, Berkeley had a net cash balance of nearly £1bn.
It is the strong balance sheet that makes the company such an attractive income play in my view. With the payout costing around £300m a year, this homebuilder could maintain its payout for at least three years even if profits evaporate overnight. In other words, Berkeley can continue to pay its shareholders whatever the weather.
Market consolidator
Finally, as well as Berkeley and BAE, if you’re looking to generate a second income from stocks, I think Phoenix Group (LSE: PHNX) might be worth considering.
Phoenix specialises in the acquisition and management of closed life insurance and pension funds, which is a relatively specialist business. The company has been buying up books of policies from other insurers that have been put off by the high capital requirements and admin costs of operating in this line of business. However, Phoenix has been able to achieve unrivalled economies of scale, and this is helping the group dominate the market.
I think Phoenix can continue to grow for many decades as it buys up new books of business from other companies exiting the life insurance and pension management business. This is excellent news for the dividend. The stock currently supports a dividend yield of 6.6%, which is already a market-beating level of income, but there is scope for further growth as management completes more bolt-on acquisitions.
