Russia’s invasion of Ukraine is over two weeks old. With this level of uncertainty, the S&P 500 has declined 10% year-to-date, as investors take stock of what has transpired and attempt to determine what are safe dividend stocks.
One area that has not suffered is aerospace and defense. The Aerospace & Defense ETF (BATS:ITA) has gained 5% year-to-date.
The invasion likely means that the U.S. and other nations will only seek to increase their spending on defense. Already, Germany has pledged 100 billion euros to fund its armed services as well raise its defense spending above 2% of its GDP. This should provide tailwinds to defense stocks.
There are multiple defense stocks with market-beating yields and safe dividends. Some of our top names include:
Safe Dividend Stocks: General Dynamics (GD)
Our first defense name to consider for safe dividend stocks is General Dynamics, the fourth largest company in the industry. The $65 billion company generates annual revenue of $38.5 billion.
General Dynamics operates four segments, including aerospace, combat systems, marine systems and technologies. The company operates a diversified business as possible in the aerospace and defense industry. No segment is responsible for more than a third of annual sales. The company’s product portfolio includes the M1 Abrams tank and Stryker vehicle as well as the Virginia-class and Columbia-class submarines. This provides customers with a range of offerings to choose from.
Aside from just defense products, General Dynamics produces the Gulf Stream business jet line, further diversifying the company’s business model.
Many of the agreements that General Dynamics, and others in the space, have with government entities are long dated as it takes years to complete production. For example, it takes almost six years to complete a single Virginia-class submarine. This essentially guarantees that customers will not cancel orders part way through the building process in order to take a loss on the project with nothing to show for it.
As a result of its strong business model, General Dynamics has been in a position to distribute dividends to shareholders for a long period of time. Including the recently announced increase of 5.9%, General Dynamics has a dividend growth streak of 31 years, the longest among the aerospace and defense companies. This growth streak also qualifies the company as a Dividend Aristocrat. The company’s dividend has a CAGR of 10% over the last decade.
General Dynamics’ dividend also appears to very safe as the new annualized dividend of $5.04 implies a projected payout of 42% for 2022. Shares yield 2.1%, a favorable yield compared to the average of 1.45% for the S&P 500.
Lockheed Martin (LMT)
Our next name for consideration is Lockheed Martin, the largest defense contractor in the world. The company has a market capitalization of $122 billion and has annual sales of $67 billion.
Lockheed Martin’s business is also diversified. Aeronautics is the largest segment within the company, but Lockheed Martin’s rotary and mission systems, space systems, and missiles and fire control contribute 26%, 17%, 16% of annual sales, respectively. These businesses produce combat ships, naval electronics, helicopters, missile defense systems and satellites.
Lockheed Martin is highly dependent on its aeronautic business, but this has been very successful over the years as the company provides state of the art aircraft to customers, including the F-16, F-22, and the F-35. The latter of these is one of the most technologically advanced, as well as expensive, aircraft ever produced. These aircraft also need updating and maintenance work, providing recurring revenue streams that come with high margins.
The company’s contracts are also long dated, giving Lockheed Martin the security of knowing that its programs will likely continue to be funded. In fact, Lockheed Martin currently has a backlog of F-35 production that won’t be worked off until the middle of this decade. This is before new orders are taken.
Finally, as the world’s leading defense contractor, any additional spending on defense from the U.S. or its allies will almost surely benefit the company, which contributes to it being considered a safe dividend stock.
Lockheed Martin has leveraged its leadership position in aerospace and defense to increase its dividend for 20 years with a CAGR of 11% since 2012.
Shares of Lockheed Martin yield 2.5% as of the most recent close, more than 100 basis points higher than the average yield of the market index. The expected payout ratio for 2022 is also 42%, meaning that shareholders of the company will be able to see their dividends increase for years to come.
Safe Dividend Stocks: Northrop Grumman (NOC)
Our last defense pick in safe dividend stocks is Northrop Grumman. The company is a leading name in the industry in its own right with annual sales approaching $36 billion and a market capitalization of $70 billion.
Northrop Grumman also maintains a portfolio of a wide variety of products, including unmanned and manned aircraft, radars, targeting systems, tactical weapons, missile defense, hypersonics and space launchers.
Northrop Grumman is one of the leaders in manned and unmanned aircraft systems. The company makes its own aircraft, such as the B-2B bomber, but also provides content for other aircraft, like the previously discussed F-35. Northrop Grumman also received the contract to work on the B-21 long-range bomber. This bomber will have one of the longest ranges of any aircraft and be able to deliver both conventional and nuclear munitions. The B-21 will become the backbone of the Air Force’s bomber fleet in the coming years.
Northrop Grumman has also used acquisitions to augment its operations. For example, the company paid more than $9 billion for Orbital ATK in 2018. This purchase added to Northrop Grumman the largest supplier of ammunition to the U.S. government. The acquisition also gave the company a larger presence in space as Orbital ATK has contracts with NASA to produce rockets to travel to the International Space Station.
Shareholders have benefited from the return of capital over the long-term. The company has been a serial repurchaser of its own stock, reducing the share count by an annual rate of 4.1% over the last decade.
In addition, Northrop Grumman has raised its dividend for 18 years. The dividend has a CAGR of 12.4% over the last 10 years, the highest of the aerospace and defense contractors discussed in this article.
Northrop Grumman has a yield of 1.4%, nearly in-line with what the S&P 500 index is offering. The projected payout ratio is 25% for 2022, which should give investors confidence that the dividend will continue to grow.
Final Thoughts
Russia’s invasion of Ukraine has created confusion and fear in the market place as investors weigh the ongoing conflict. With uncertainty in the market place, investors should be looking for companies that should perform well if the conflict continues.
The aerospace and defense sector is one area of the market that should see growth as these companies should see higher revenue due to an expected increase in defense spending. This should also enable continued dividend growth as these companies have additional capital to return to shareholders.
General Dynamics, Lockheed Martin, and Northrop Grumman are three of our top picks for income in this space as each company is a leader in its industry. Each company has also demonstrated a long-term commitment to dividend growth, making any of the three a candidate for purchase for those looking for exposure to the aerospace and defense industry.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.