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:
The current yield
The dividend growth
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 into aerospace 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:
5-Year Avg. Annual Div. Growth Rate
Data: Motley Fool CAPS
Dividend investors typically focus first on yield. Lockheed Martin and Raytheon are the highest-yielding stocks in this list. Very often, the highest yielders aren't your best bets - after all, a stock plunging due to real trouble will result in a spiking yield. But these two companies don't raise such concerns. Some worry about likely cuts in defense spending in the U.S., but there's a chance that the cuts won't be severe, and may not happen any time soon due to gridlock. (Lots of uncertainty remains, though.) Meanwhile, Lockheed has been racking up contracts, such as an $873 million one with the Pentagon, and $253 million from Saudi Arabia, and Raytheon has been collecting its share , too. These companies are looking to grow their global business to offset U.S. cuts, and non-military sales hold some promise, as well.
Instead, let's focus on the dividend growth rate first, where CAE and HEICO lead the way. Their growth rates are so steep, though, that they may be hard to maintain for long. Their low payout ratios, though, make that far from an immediate concern. Still, their current payouts lag many others.
Some aerospace and defense companies, such as Smith & Wesson Holding and TASER International , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Both of these companies are on the small side, with market caps below $600 million, and both have fared well over the past year, each rising more than 80%. Gun sales have been booming recently, as gun control legislation is being considered, and some opposed to guns are viewing tasers with more interest. Smith & Wesson recently reported a strong order backlog, and TASER also reported orders for thousands of weapons recently.
As I see it, Lockheed Martin, Raytheon, and Elbit Systems offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Elbit is far smaller than the other two, and it has also been collecting contracts lately, such as more than $300 million worth from Israel, where it's based. It, too, is broadening its reach geographically, such as in Asia and Latin America. Other companies in the industry are also worth a closer look.
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.
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The article The Most Promising Dividends in Aerospace and Defense originally appeared on Fool.com.
Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends HEICO. The Motley Fool owns shares of Elbit Systems Ltd. (ADR), Lockheed Martin, and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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