Why the BAE share price could crush the FTSE 100

A person holding onto a fan of twenty pound notes
A person holding onto a fan of twenty pound notes

Although inflation has fallen in recent months, it remains significantly higher than interest rates. Given the projected path of interest rates over the medium term, this is likely to remain the case for many years.

As such, dividend shares such as BAE(LSE: BA) are likely to remain popular among investors in future. This could increase demand for them and lead to higher share prices. Therefore, alongside another income stock which reported positive results on Friday, the aerospace and defence company could have investment appeal.

Improving prospects

The industry in which it operates has experienced a mixed period in recent years. Austerity has caused defence budgets across the globe to come under pressure, while a turbulent economic performance has failed to create confidence in the wider industry. As a result, BAE's earnings growth has been lacklustre in recent years, rising at an annualised rate of just 2.4% during the last five years.

Looking ahead, there could be improving prospects for the company. Higher military spending in the US and an improving outlook for the wider economy look set to contribute to a rise in its bottom line of 8% next year. This could help the company to pay a higher dividend over the medium term.

Income potential

With BAE having a dividend yield of 3.5% at the present time, its income return is already well ahead of inflation. Its dividend growth rate could also beat inflation over the medium term, with its shareholder payouts currently being covered 1.9 times by profit. As a result, it would be unsurprising for the company's dividends to rise fairly quickly over the coming years, since they seem to be very affordable.

Furthermore, with the company seeking to become more efficient and having a modest debt level, its long-term outlook appears to be positive. As such, its income prospects from a risk/reward ratio could be encouraging.

Growth potential

Also offering upbeat income prospects is specialist staffing business SThree(LSE: STHR). The company released a positive half-year trading update on Friday which showed that it continues to generate improving financial performance. Gross profit was up by 11% versus the prior year, with strong performance in Europe and the US offsetting a modest decline in UK profitability.

Looking ahead, the company appears to be protected from the potential ill-effects of Brexit through its international exposure. It generates 82% of gross profit from outside the UK, and this could provide it with greater stability than some of its more UK-focused peers.

With SThree forecast to post a rise in its bottom line of 17% in the next financial year, it seems to be performing well. This could lead to higher dividend growth, with its shareholder payouts currently covered twice by profit. As a result, and with it having a dividend yield of 4.4% at the present time, the stock may prove to be a solid income performer in the long run.

Buy-And-Hold Investing

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Peter Stephens owns shares of BAE Systems. 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.