The BAE Systems passive income case rests on a straightforward proposition: defence spending is rising across NATO and allied nations, and the company collecting the contracts is already at record highs, yet its financials suggest the run is not finished. For investors wondering whether August 2026 is simply too late to build dividend income through a Stocks and Shares ISA, the arithmetic argues otherwise.
The FTSE 100 and S&P 500 are both trading at or near all-time highs. The S&P 500, on average over the past 80 years, has hit a new record roughly 17 to 18 times a year. Research has shown that investing on those record days produces returns virtually identical to investing on random trading days. The fear of buying at the top, in other words, is historically unfounded.
Record Order Books Underpin the Dividend
BAE Systems (LSE: BA.) trades at around 2,230p, up from a previous record of 650p breached in 2022. The shares have continued to rise since that earlier high, driven by increased defence budgets in the wake of the Ukraine conflict and other geopolitical pressures.
The company’s 2024 full-year results give that trajectory a firm financial foundation. BAE Systems secured £33.7bn of orders during the year ended 31 December 2024, including a £4.6bn contract for the first three Hunter Class frigates in Australia. Its Hägglunds combat-vehicle business received orders totalling approximately $2.5bn (£2.0bn) across 2024 alone.
Underlying EBIT for the year ended 31 December 2024 came in at £3,015m, with underlying EPS of 68.5p and free cash flow of £2,505m, according to the same results release.
For 2025, management guided for sales growth of 7% to 9% and underlying EBIT growth of 8% to 10%, with cumulative free cash flow targeted in excess of £6.0bn for 2023 to 2025.
BAE Systems as a Passive Income Candidate in 2026
The most recent figures extend that picture into the current year. For the six months ended 30 June 2026, BAE Systems reported revenue of £14,615m, up 8% from £13,571m in H1 2025. Operating profit rose 13% over the same period, and basic EPS reached 34.1p, up 6%.
The interim dividend declared for H1 2026 stands at 15.0p per share, payable on 2 December 2026. The company returned £933m to shareholders through dividends and its share buyback programme in H1 2026, a 10% increase on the £849m returned in H1 2025.
The HY 2026 Half Yearly Report shows the company held cash of £4,200m as at 30 June 2026, with net debt (excluding lease liabilities) of £3,173m.
The order backlog, according to Financial Modeling Prep’s market summary, has reached £83.6bn, a £5.8bn increase from 2024. The company is guiding for sales growth of 7% to 9% in 2026 and projects cumulative free cash flow exceeding £6bn between 2026 and 2028.
Valuation is not trivial. A price-to-earnings ratio of 31 sits above the FTSE 100 average, and some investors will rule the stock out on ethical grounds given its core defence business. Neither consideration should be dismissed.
The counter-argument lies in the contracts. An order book of £83.6bn provides revenue visibility that most FTSE 100 companies cannot match. Governments across Europe, the Asia-Pacific region, and North America are committing to sustained defence budget increases, and BAE Systems sits at the manufacturing end of those commitments, not merely the advisory or supply-chain fringe.
For a Stocks and Shares ISA investor building passive income over a five-to-ten-year horizon, BAE Systems offers a growing dividend funded by free cash flow that has already exceeded £2.5bn in a single financial year. The shares may be near an all-time high; so, by historical precedent, are they most years.
The next read on momentum comes when BAE Systems updates the market on full-year 2026 trading and whether the cumulative free cash flow target for 2026 to 2028 remains on track.
