When it comes to dividend growth, BAE Systems (LSE:BA.) is one of the FTSE 100‘s greatest shares. Annual dividends have risen for the last 22 straight years.

What’s more, during the past decade they’ve increased at an impressive average annual growth rate of 6.1%:

This great growth record means the dividend yield on BAE shares has averaged 3.7% since 2016. That’s at the upper end of the FTSE 100’s long-term average (3% to 4%).

The question is, what makes the defence company such a reliable passive income grower? And more importantly for investors today, can it keep its proud dividend record going?

Visibility and cash

Like other defence shares, BAE Systems enjoys supreme earnings visibility, giving it the confidence to raise dividends each year. This reflects the critical nature of the products it supplies, and the long-term government contracts it enjoys.

Encouragingly, profit visibility right now is the best it’s ever been — as of December, BAE’s order backlog was a record £83.6bn. The reason why? Defence budgets have boomed in recent years, and in 2025, hit new all-time highs amid rising geopolitical tensions.

Another reason for BAE’s strong dividend growth record is its immense cash flows. This is helping the company fund a huge £1.5bn, three-year share buyback programme as well as paying increasingly tasty dividends. The firm’s expecting to generate £6bn of free cash flow between now and 2028 to fund shareholder returns and invest in the business.

Finally, BAE Systems dividend policy is to maintain a payout ratio of roughly 50% of earnings. The result? A balance between rewarding shareholders and funding business growth which supports steady, long-term dividend growth.

What’s the catch?

Having said all this, dividends are never guaranteed, never mind the payout growth BAE shares have reliably delivered. Rising competition and a loss of top-tier status with major customers could put future payout growth in jeopardy.

And while the business has a great track record of project execution, disastrous tech failures in the field are a constant threat for any defence company. And one that could have a significant impact on future returns for BAE investors.

So should investors still contemplate buying the FTSE stock for dividends? All things considered, my answer is an emphatic ‘yes’. City analysts are certainly confident dividends will keep growing over the medium term, forecasting 2025’s full-year payout of 36.3p per share will rise to:

• 39.6p in 2026
• 44.3p next year
• 49.2p in 2028

How secure are forecast dividends?

BAE’s cash rich balance sheet and strong dividend cover leaves these forecasts looking in good shape. Predicted earnings cover expected payouts between 2 and 2.3 times each year to 2028.

There’s one fly in the ointment for income investors, though. Dividend yields sit at 2% for this year, 2.2% for 2027, and 2.4% the year after. Each is below the 10-year average of 3.7%. Still, the prospect of reliable and rapidly growing dividends long into the future makes BAE Systems shares worth serious attention.

Should you invest £5,000 in BAE Systems right now?

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Royston Wild does not hold any positions in the companies mentioned.