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Love Dividends? 3 Stocks You Might Want to Buy

By Daniel Foelber - Mar 26, 2021 at 11:32AM

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This Dividend Aristocrat (and two in the making) have a track record for increasing their payouts.

March, the month of spring and new beginnings, has also been the month of volatility in the stock market as of late. Last year, it marked the bottom of the COVID-19 plunge. This year, March has included multiple 2.5% or greater declines in the Nasdaq and a big sell-off in several tech and renewable energy stocks. Shakespeare did warn us to "beware the ides of March," after all.

Volatility is inevitable, but dividends are a great way to combat it. Dividend stocks distribute income to shareholders no matter how the market is moving. This feature makes it easier to weather market crashes and volatility without having to sell stock. Lockheed Martin (LMT -0.34%), Honeywell (HON -1.50%), and Clorox (CLX 0.11%) are three dividend stocks that income investors are sure to love. Here's why.

A rendering of a watering can shooting pennies into a potted plant that sprouts a rose made of cash.

Image source: Getty Images.

1. Lockheed Martin

Aerospace and defense contractor Lockheed Martin has been a pretty mediocre stock to own as of late. While the S&P 500 index has soared over 65% in the last year (bouncing off the sell-off in March 2020), Lockheed shares have given investors a comparably weak total return of just 16%. And as the S&P 500 rallied over 18% over the past six months, Lockheed has fallen 10%.

LMT Chart

LMT data by YCharts

Lockheed's biggest criticism is its low growth rate. U.S. defense spending is expected to stagnate over the next few years. Seeing as the U.S. government comprised 74% of Lockheed's 2020 sales, this news means a great deal to the company's future growth. But the news isn't as bad as it seems.

Many industrial stocks had lower revenue and earnings in 2020. Lockheed wasn't one of them. In fact, it's coming off its best year ever -- notching record revenue, net income, and a record-high backlog of $147 billion. After initially guiding for 2021 revenue to be 2% to 3% higher than in 2020, Lockheed has since raised that estimate to 4%. It's also guiding for 2022 operating cash flow of $8.7 billion, up from its earlier estimate of $7.8 billion. And it expects to earn $26 to $26.30 in earnings per share (EPS) in 2021, 8% higher than 2021. 

Low growth aside, these numbers are music to dividend investors' ears. Lockheed's strong cash flow supports its growing dividend, which it just raised to $10.40 per share for a yield of 2.9%. Its EPS estimate gives it a forward P/E ratio of just 13.4, which is at the low end of Lockheed's historic valuation and well below the market average. Lockheed's backlog combined with the reliability of the U.S. government as a customer gives its guidance credibility. Lockheed's share price may not do much, but its dividend is about as solid as they come.

2. Honeywell

Industrial conglomerate Honeywell had 11% lower sales, 13% lower adjusted earnings, and 15% lower adjusted free cash flow (FCF) in 2020 compared to 2019. Yet its share price is hovering right around an all-time high. The fact that Honeywell can have a bad year and beat the market, whereas Lockheed can have its best year ever and underperform the market, seems backwards. But in reality, it illustrates the power of future earnings over short-term results.

Honeywell's biggest segment is aerospace, which comprised 38% of its 2019 sales. Unlike Lockheed, which makes fighter jets and satellites (among other things), Honeywell fills a support role. It makes the components on board satellites, navigation solutions, braking systems, engines, power units, and more. Only 38% of its aerospace sales are related to defense and space. The other 62% are involved in commercial aviation aftermarket and original equipment, which was hit hard by the pandemic.

Despite its down results, Honeywell was able to generate an impressive $5.3 billion in adjusted FCF, more than double the $2.6 billion it paid in dividends. Like Lockheed, Honeywell is able to consistently afford its dividend throughout economic cycles, which encourages dividend raises. In the fourth quarter, Honeywell raised its quarterly dividend from $0.90 per share to $0.93 per share, which is more than three times what it was paying 10 years ago. 

3. Clorox

Like Lockheed Martin, 2020 was Clorox's (the company's) best year ever. But also like Lockheed, it was not a good year for Clorox (the stock). After an initial surge, shares of Clorox cooled off and are, in fact, down 3% over the past year. Clorox is receiving similar treatment as Lockheed and Honeywell in that the market is interested in its future earnings potential, not last year's "one-off" results. Clorox will face challenging comparisons in the years ahead that could result in stagnating or negative growth. However, if you like dividends, then there's a lot to love about Clorox.

LMT Revenue (TTM) Chart

LMT Revenue (TTM) data by YCharts

Clorox is a consumer staple company whose products garner consistent demand despite the economic cycle. Coming off a record year, Clorox's coffers are overflowing with cash which it intends to use to buy back shares and pay dividends. It may not grow earnings over the next few years, but there's a very good chance it will generate ample cash to continue raising its dividend. Clorox has a reputation for increasing its payout. In fact, it has over 40 years of consecutive annual dividend raises, making it a Dividend Aristocrat. Clorox stock isn't for everyone. But it's a great option for retirees or really anyone looking to get a relatively safe 2.4% cash return.

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Stocks Mentioned

Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
$424.15 (-0.34%) $-1.47
The Clorox Company Stock Quote
The Clorox Company
$138.30 (0.11%) $0.15
Honeywell International Inc. Stock Quote
Honeywell International Inc.
$189.75 (-1.50%) $-2.90

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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