What happened
On Wednesday night, the U.S. Senate passed its Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), and by Friday, this $2 trillion stimulus package could sail through the House of Representatives as well. Then, in the final step, President Trump has promised to sign the bill into law immediately.
Defense stocks General Dynamics (GD 0.93%), Textron (TXT 0.50%), and Northrop Grumman (NOC 1.82%) are soaring in response, up 9%, 9.6%, and 10.7%, respectively, as of 12:30 p.m. EDT today.
Image source: Getty Images.
So what
Large portions of the stimulus bill are targeted directly at shoring up operations at top industrial stocks and defense stocks -- categories that encompass General Dynamics, Textron, and Northrop.
The headline figure in the CARES Act is $500 billion in loans and loan guarantees for large companies affected by COVID-19, fully a quarter of the total assistance contained in the package.
And the CARES Act allocates $17 billion in loans and loan guarantees to businesses crucial to maintaining national security.
Now what
Companies accepting the loans and loan guarantees must commit to not pay dividends or make other capital distributions (like stock buybacks) to their shareholders until 12 months after the date the loan or loan guarantee is no longer outstanding.
Assuming these companies avail themselves of the aid, therefore, it could be a good long while before investors can expect to receive any dividend income from them. That probably doesn't seem like such a big deal to investors in Textron, which only has a 0.3% dividend yield. But for shareholders in Northrop Grumman (with an 1.8% yield) or General Dynamics (3.6% yield), it could be a much more significant factor in your decision to buy or sell.
