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Looking for a second income stream? I’d buy these FTSE 100 dividend stocks

Rupert Hargreaves
Twenty pound notes in back pocket of jeans

Building a second income stream with FTSE 100 stocks could help you achieve a steady, growing passive income over the long run.

Here are two companies that stand out right now supporting attractive income credentials.

BAE Systems

Defence group BAE Systems (LSE: BA) has been on the warpath over the past six years. The company has been investing in growth, and these efforts are starting to pay off. It earned a net profit of just £168m in 2013. This year, analysts are forecasting a net income of £1.5bn. That’s a compound annual growth rate of more than 40%.

To complement growth, the company recently announced it would acquire two US defence contractors. It’s buying Collins Aerospace’s Military Global Positioning System and Raytheon’s Airborne Tactical Radios business for $2.2bn. The two deals will significantly increase BAE’s presence in the world’s largest defence market.

The deals will also increase borrowing. However, BAE’s cash generation suggests the company has plenty of money available to sustain these additional debt obligations while maintaining its distribution to investors. Further, selling defence equipment tends to be a relatively predictable business. Governments want a reliable supplier and they are prepared to sign deals that last for many years (in some cases up to a decade) to guarantee this.

The stock currently supports a dividend yield of 3.6% and it’s covered twice by earnings per share. Meanwhile, shares in the defence group are trading at a price-to-earnings (P/E) ratio of 14, which suggests they offer a wide margin of safety at current levels.

All of the above implies BAE can produce that steady, growing passive income for investors for many years to come.

Mondi

I’m also optimistic about the long term income outlook for paper and packaging company Mondi (LSE: MNDI). Over the past six years, Mondi’s earnings per share have risen at a compound annual rate of 16%. This has helped the company grow its dividend to investors at an average rate of 16% per annum.

At current levels, the stock supports a dividend yield of 4.2%, and the distribution is covered twice by earnings. These numbers suggest the payout is quite safe for the time being.

As one of the largest packaging companies in Europe, Mondi has a unique competitive advantage. It can produce more product at a much lower cost than most of its competitors. As long as management maintains this advantage by reinvesting excess profits back into the business, Mondi should be able to maintain its market position for decades.

That’s great news for investors seeking a long term rising passive income from the stock. Earnings growth should allow the company to increase its dividend steadily while providing capital to reinvest back in the business.

Shares in the company are currently dealing at a P/E of just 10.9, suggesting they offer value at current levels. As such, if you’re looking for an FTSE 100 income play to give you a passive income, Mondi could be a great addition to your portfolio today.

The post Looking for a second income stream? I’d buy these FTSE 100 dividend stocks appeared first on The Motley Fool UK.

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The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2020