Even with last week's market rebound, many stocks remain down substantially for the year and well off their highs.
It's never a good idea to jump into and out of what's working or not working in the stock market over a short-term time frame. But it is important to invest in businesses that suit your personal risk tolerance. 2022's swift and severe market volatility is a painful reminder that while the stock market tends to go up more often than it goes down, it goes down faster than it goes up.
If you're looking for safe and stable companies that also pay attractive dividends, you've come to the right place. Defense giants Raytheon Technologies (RTX -0.04%) and Lockheed Martin (LMT 0.01%), as well as regulated utility Essential Utilities (WTRG 1.88%) are three dividend stocks that are well positioned to execute on their targets even if macroeconomic factors and geopolitical risks escalate.
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Raytheon Technologies remains undervalued
Lee Samaha (Raytheon Technologies): Defense and commercial aviation giant Raytheon Technologies is well placed to benefit from favorable trends in the coming years. The two markets have worked together very well in recent years, with the defense businesses supporting the company with earnings and cash flow during the pandemic.
Moving into 2022, the investment narrative around the stock was that the commercial aviation businesses (Pratt & Whitney aircraft engines and Collins Aerospace) would take over the growth baton as the company marches toward its target of $10 billion in free cash flow by 2025. The idea is that a multi-year recovery in commercial flight departures will lead to aircraft manufacturers ramping up production and higher demand in the aviation aftermarket. Both are great news for Raytheon Technologies' Pratt & Whitney and Collins Aerospace.
The scenario outlined above remains in place, and commercial flight departures continue to recover strongly. However, it's fair to say that the tragic events in Ukraine have raised the likelihood that there will be a renewed emphasis on defense spending. As such, a hike in Raytheon's medium-term earnings estimates may be penciled in.
Raytheon's stock currently has a dividend yield of 2.1%, generated by a payout of around $3 billion. Given that management expects $6 billion in free cash flow in 2022, growing to $10 billion by 2025, the dividend is very well covered. Indeed, the potential to expand the dividend over the long term looks significant.
A reliable dividend stock for the short term and the long term
Daniel Foelber (Lockheed Martin): I think Lockheed Martin stock deserves a look despite the fact that it recently blasted through a new all-time high. The defense contractor is a little more appealing than Raytheon on the dividend front, with a current dividend yield of 2.6% versus Raytheon's 2.1%.
Due to years of underperforming the market despite consistently higher earnings and free cash flow, Lockheed Martin stock remains inexpensive compared to its historic levels even after its recent run-up. Part of the reason for Lockheed stock's 20% year-to-date gain in a down market undoubtedly has to do with geopolitical risks that have put a spotlight on defense giants and the potential for heightened military spending by the U.S. and its allies.
Taking a short-term mindset on Lockheed stock by using it as a hedge against broader market risk may work, but it's not a good way to approach investing in a company over the long term. Rather, a better way of approaching Lockheed Martin now is to ask how the business is doing and where it is headed. On that front, Lockheed Martin is likely going to continue a slow and steady growth trajectory backed by predictable long-term contracts.
To compensate investors for its slow growth, Lockheed Martin has been buying back stock and raising its dividend. The below chart tells you everything you need to know about the company's commitment to raising the dividend.
LMT Dividend data by YCharts
Over the past 10 years, Lockheed has increased its dividend by 180%. It also bought back a record-high $4.09 billion of its own stock in 2021. As one of the leading U.S. defense contractors, Lockheed Martin stands out as one of the safest dividend stocks not just to combat inflation or last through geopolitical risk, but also as a reliable passive income stream for decades to come.
Wet your whistle with this utility stock
Scott Levine (Essential Utilities): For many investors, market downturns like the one we are currently experiencing can be disconcerting, leading them to fortify their holdings by buying less-volatile stocks. During boon times, these conservative stocks are hardly stealing the spotlight from innovative market disruptors that represent ample growth potential, but it's times like these when less-sexy, conservative stocks like Essential Utilities -- which offers a 2.3% forward dividend yield -- take center stage. Providing water, wastewater, and natural gas services to 5 million customers in 10 states, Essential Utilities offers indispensable services that are in demand regardless of market conditions.
Because it operates in regulated markets, Essential Utilities doesn't have the luxury of arbitrarily raising prices when the mood strikes. In 2021, for example, 98% of the company's $1.9 billion in operating revenue came from the company's business in regulated water and natural gas markets. On the other hand, the company does have excellent foresight regarding future finances. Management, for example, projects growing its water assets (excluding acquisitions) at a compound annual growth rate (CAGR) of 6% to 7% from 2021 to 2024; similarly, it forecasts growing natural gas assets at an 8% to 10% CAGR during the same period. These projections, furthermore, lead management to believe that the company will grow its earnings per share at a 5% to 7% CAGR to 2024, from the $1.67 it reported in 2021.
Besides the EPS outlook, passive income aficionados will appreciate management's approach to dividend growth over the next few years. Essential Utilities aims to raise the dividend at a similar pace to the EPS growth -- similar to what the company has done in the past. From 2016 through 2021, the dividend grew at a CAGR of 7% while the company's EPS grew about 5%. And it's not as if management expects to place the company in hot water, in terms of its financial health, solely to placate investors. Management plans on keeping its payout ratio below 65% -- a welcome sight for investors on the lookout for conservative dividend stocks.
