The 5 Best Dividend Stocks in Aerospace

With $4.52 in dividends paid over the past 12 months, a single SPDR S&P Depositary Receipt (SPY 0.33%) currently yields 1.9%. That's probably more money than your bank will pay you on your savings account -- but it's still not a lot of money. So can you do better?

Historically, Aerospace & Defense has been a great place for investors seeking consistent, above-average dividend payments. Lately, however, it's become harder to find above-market dividends even in aerospace. This is not necessarily a bad thing. After all, dividend yields are calculated by dividing a company's dividend payment by its stock price. Thus, when dividend yields fall, it's often the case that this is because stock prices have risen -- and this has been the case in aerospace.

The sky's the limit for some of these aerospace dividends. Image source: Getty Images.

Still, it does pose a problem for investors who want to own a piece of the booming aerospace industry, but who also want to be paid for their investments in the form of steady dividend income. To help you with that, I've scanned the industry and culled the below-average dividend payers, emerging with a handful of top aerospace stock ideas that just happen to pay above-average dividends as well.

Here are my top five prospects, listed in order of dividend attractiveness.

Data sources: S&P Global Market Intelligence, Yahoo! Finance.

General Electric

With every passing quarter, it seems General Electric (GE 1.05%) is pulling farther away from its historical roots, and focusing more on remaking its business as a provider of heavy equipment to the power and fuel extraction industries. But despite all the changes, one thing remains constant: GE is still an important provider of airplane engines to the aerospace industry.

Last year, GE's Aviation division generated sales of $26.3 billion, making it GE's second biggest business after Power. And with pre-tax profits of $6.1 billion, Aviation is already easily GE's most profitable business -- and likely to become more so. Over the past five years, GE has grown Aviation sales 39%, and Aviation profits nearly twice as much -- up 74%. GE Aviation's strength is one reason General Electric boasts the second strongest earnings growth rate of any company on this list. And so long as things continuing going well in the booming aerospace industry, GE's sector-leading dividend yield of 3.5% should remain secure.

BAE Systems

U.S. investors may be less familiar with my second aerospace dividend stock, London-listed BAE Systems (BAESY 4.80%) -- but they might want to get acquainted with it. One of the UK's biggest military contractors, BAE Systems builds Typhoon fighter jets and British warships, armored personnel carriers and military electronics. (Its breadth of products and services makes it look a little bit like a British version of Lockheed Martin (LMT 0.36%).)

BAE also pays a big dividend, albeit not quite as big as GE's -- 3.2%. With a payout ratio of only 73%, though, BAE also has more room to grow its dividend checks if it so chooses. Top it all off it has a lower valuation on a price to earnings (P/E) ratio basis than GE's. BAE may be worth a look for investors seeking a bit of international flavor in their dividend portfolios.

Boeing

Next up: Boeing (BA +0.47%). The biggest name in commercial aircraft and the fastest at growing profits -- based on estimates -- on this list, Boeing's a name that will be familiar to any investor in the aerospace sector. One-half of a global airplane-building duopoly (with Airbus (EADSY 3.89%), whose 1.8% dividend yield is too tiny to make this list), Boeing sells $95.6 billion worth of airplanes and other products and services in a year -- 27% more than Airbus. What's more, with trailing net profits of $5.1 billion, Boeing is much more profitable than Airbus -- more than one full order of magnitude greater.

Boeing's business spans the full range of aircraft, from civilian airliners to commercial freighters to military fighter jets and auxiliary aircraft, bringing it into direct competition with ...

Lockheed Martin

Easily America's biggest pure-play defense company, Lockheed Martin does $48 billion worth of business annually. Its most famous product today is the F-35 Lightning II stealth fighter jet, a plane destined to become the most ubiquitous fifth-generation fighter on the planet -- much like Lockheed's F-16 is currently the most popular fourth-generation fighter in the world.

So what does the F-35 mean for Lockheed Martin as a stock, and as a source of steady dividend income? The U.S. Air Force expects to still be flying F-35s well into the 2070s -- more than 50 years from now -- and analysts believe this single program could come to be responsible for generating as much as 50% of Lockheed Martin's annual sales. Assuming that's how things play out, Lockheed's dividend should be safe for decades to come.

United Technologies

Last but not least, we come to United Technologies -- incidentally, the manufacturer of the F135 jet engine that powers Lockheed Martin's F-35, and a beneficiary of multiple billion dollar contracts for that engine's production. A diversified industrial supplier, United Technologies derives $14.9 billion a year in revenues from its Pratt & Whitney engines business, and a further $14.5 billion from its complementary Aerospace Systems division. Respectively United Tech's second and third largest divisions, these two businesses account for well over 50% of the company's business.

That said, United Technologies' two aerospace divisions only produce about 44% of the company's profits. They're part of the reason (one imagines) that United Tech is only able to ante up 2.2% in annual dividend payments -- and part of the reason that with growth estimates of less than 7%, United Tech is the slowest grower on this list.

Which of these stocks should a dividend-hungry investor buy? That's a choice to be made based as much on what these companies are paying today, as on what they might pay tomorrow. (In which regard, lower payout ratios leave more room for expanding dividends -- but faster growth rates may be even more important, by foreshadowing more profits becoming available for paying out as dividends in the future).

Opinions may differ here. But personally, I think Boeing stock offers the best combination of a good current dividend yield, moderate room for improvement in the payout ratio, and strong earnings growth to support richer dividends in the future.