The Most Promising Dividends in Aerospace and Defense

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Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the aerospace and defense industry offer the most promising dividends.

Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times, and bolster it during market downturns.

As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."

When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.

When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:

  1. The current yield
  2. The dividend growth
  3. The payout ratio

If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.

Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.

Peering intoaerospace and defense
Below, I've compiled some of the major dividend-paying players in the aerospace and defense industry (and a few smaller outfits), ranked according to their dividend yields:

Company

Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

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Raytheon4.4%7.6%28%Add
Lockheed Martin (NYS: LMT) 4.2%19.2%36%Add
Northrop Grumman (NYS: NOC) 3.9%9.5%29%Add
General Dynamics3.4%10%25%Add
Honeywell (NYS: HON) 3.1%7.3%37%Add
L-3 Communications (NYS: LLL) 3%19.3%20%Add
Boeing (NYS: BA) 2.8%8.2%36%Add
Kaman2.4%2.6%26%Add
Rockwell Collins1.9%12.9%25%Add
Goodrich1%7.7%22%Add
FLIR Systems0.9%New dividend9%Add
Textron (NYS: TXT) 0.5%(41.2%)20%Add

Data: Motley Fool CAPS.

If you focus on dividend yield alone, you might end up with Raytheon, but its dividend isn't growing as rapidly as some other contenders'.

Instead, let's focus on the dividend growth rate first, where Lockheed Martin and L-3 Communications lead the way. Growth rates that are as steep as theirs often raise concerns that they will be hard to maintain for long. With low payout ratios such as theirs, though, that's far from an immediate threat.

You may notice, too, that some notable players in the industry, such as TASER International (NAS: TASR) , aren't on the list. That's because smaller, fast-growing companies often prefer to plow any excess cash into further growth rather than pay it out to shareholders.

Just right
As I see it, among the companies above, Lockheed Martin offers the best combination of dividend traits, sporting solid income now and a good chance of strong dividend growth in the future. L-3 Communications and Northrop Grumman are worth considering, too.

Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.

Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.

Looking for someAll-Star dividend-paying stocks? Look no further.

At the time this article was published Longtime Fool contributor Selena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of General Dynamics, Northrop Grumman, Lockheed Martin, L-3 Communications, Textron, and Raytheon.Motley Fool newsletter serviceshave recommended buying shares of L-3 Communications. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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