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Why This Defense Giant Might Be the Market's Best Dividend Stock

By Daniel Foelber – Sep 30, 2021 at 9:15AM

Key Points

  • Lockheed Martin has several characteristics that make it a great dividend stock.
  • Lockheed just raised its dividend to $2.80 per share per quarter.
  • It’s understandable that Lockheed stock has underperformed a market that is centered around growth.

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This value stock could be an ideal fit for income investors.

Close your eyes and imagine the characteristics of an ideal dividend stock. Are you picturing it? Strong fundamentals, a track record of outlasting recessions, certainly a high yield. The reality is that these characteristics are harder to come by now than just a few years ago.

The S&P 500 index is up over 50% in the past three years, which has been great for investors. As a result, many excellent dividend stocks now yield a lot less than they used to. In fact, the average stock in the S&P 500 now yields around 1.3%. The main reason for the low average yield has to do with the growth of several leading technology and communications stocks. As a group, they comprise a larger share of the index, but many don't pay dividends. Meanwhile, the stodgy blue-chip companies that do pay dividends are raising them more slowly than their stock prices are growing.

A cow covered in cash standing on top of a stack of U.S. $100 bills.

Image source: Getty Images.

It may be a contrarian opinion, but there's an argument to be made that leading U.S. defense contractor Lockheed Martin (LMT 0.38%) could very well be the market's best dividend stock. Here are five reasons why. 

1. Lockheed Martin is a leader in its industry

When it comes to dividend payments you can count on, it's typically best to go with a bigger company with competitive advantages that won't go away anytime soon. Age isn't as important as a sustainable moat. Stalwarts like IBM may have high yields, but they continue to lose market share to their competitors.

Lockheed Martin has an entrenched position in military aircraft, missile systems, helicopters, satellites, and other products that are staples of the U.S. (and its allies') defense industries. The U.S. defense budget had stagnated and is expected to grow in the low-single digits over the short- to medium-term. However, the U.S. House of Representatives passed a $777.9 billion defense bill on Sept. 23, representing a 5% increase compared to the fiscal year (FY) 2021 bill. According to the Wall Street Journal, the higher-than-expected increase is largely due to a 2.7% raise to troops' pay, the creation of the Office of Countering Extremism, and funding for more equipment, including 13 additional battleships. 

2. Lockheed has stable and growing earnings

Lockheed's aircraft continue to comprise the majority of U.S. aircraft spending. The F-35 program made up 28% of Lockheed's 2020 sales and is the single largest aircraft line item on the FY 2022 budget. The backlog for the F-35 and other programs extends out several years, giving Lockheed consistent and predictable business. 

In addition to programs that have been around for decades (like the Black Hawk and C-130 transport aircraft), Lockheed is also a leader in hypersonic missiles, government satellite programs, and strategic and missile defense, including hypersonic development programs. Lockheed's products garner demand no matter the market cycle.

Navy personnel work on an F-35B aboard the aircraft carrier USS America.

Image source: Lockheed Martin.

3. Lockheed's dividend offer a competitive yield

With a dividend yield of 3%, Lockheed Martin is one of just two industrial stocks in the S&P 500 with a greater-than-3% yield. A 3% yield may not sound like much when the market is blazing toward new highs. But it makes a big difference for retirees looking to supplement income.

For example, a $1 million retirement nest egg earning 3% can last 30 years with annual withdrawals of $51,000. Annual withdrawals go down to less than $45,000 at a 2% interest rate. At 1%, annual payouts go below $39,000. Put another way, a 3% yield is meaningful on its own, even if the stock price does nothing.

4. Lockheed is consistent in raising its dividend

Lockheed Martin has raised its dividend for 19 consecutive years, bringing it within striking distance of a spot on the list of Dividend Aristocrats. On Sept. 23, Lockheed announced another dividend raise, bringing the quarterly payout to $2.80 per share and an annual yield of 3.2%. 

In addition to dividend raises, Lockheed approved a share repurchase plan of up to $6 billion. Lockheed is returning most of its free cash flow to shareholders in the form of dividends and share buybacks. And it can do all of that without adding debt to its balance sheet.

5. Lockheed has a healthy balance sheet

Lockheed's financial position is rock-solid. The company has steadily decreased its net total long-term debt position thanks to its ability to generate tons of cash.

LMT Net Total Long Term Debt (Quarterly) Chart

LMT Net Total Long Term Debt (Quarterly) data by YCharts

Lockheed may not be a fast-growing company, but its financial health underpins its ability to raise dividends, buy back shares, and reinvest in the business.

It's prudent to hear what the devil's advocate has to say

The best argument against Lockheed is that its stock has underperformed the S&P 500. Lockheed has given shareholders a total return of 62% over the last five years, compared to the S&P 500's 126% total return. Over the last three years, Lockheed has produced a mere 10% total return compared to the market's 61%.

Lockheed's underperformance isn't a good look, but the stock is doing exactly what it is supposed to do. It's hard for a value stock like Lockheed to outperform a market that is centered around growth stocks.

Over the last five years, Lockheed has posted year after year of record revenue and earnings and grown its dividend to boot. A Lockheed Martin investor isn't someone who's trying to beat the market. Rather, it's someone who wants to invest in a relatively safe, low-risk, high-income stock at a great value.

Lockheed isn't the best stock in the S&P 500, but its characteristics could very well make it the best stock out there for risk-averse income investors.

Daniel Foelber owns shares of Lockheed Martin and has the following options: long December 2021 $330 calls on Lockheed Martin, long January 2022 $340 calls on Lockheed Martin, short December 2021 $335 calls on Lockheed Martin, and short January 2022 $345 calls on Lockheed Martin. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

Stocks Mentioned

Lockheed Martin Stock Quote
Lockheed Martin
$485.83 (0.38%) $1.83

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

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