Growing dividends can be a stockholder's best friend. They help investors to sleep well at night knowing their investments will offer a return, even in a down market. Using a dividend reinvestment plan (DRIP), these same investors can take advantage of downward swings in the share price and consistently increase holdings in these dividend-paying stocks.
If the price falls, a DRIP means the effective yield grows steadily over time. If the stock price grows, the price appreciation adds to the value that the dividend was providing. For income investors, perhaps the quarterly check is the attraction. No matter the reason for buying, a great dividend stock can be a valuable part of a diversified portfolio, especially one purchased with the intent to buy and hold.
What dividend stocks should you consider?
War is expensive. Russian Leader Vladimir Putin is learning that first-hand after his country invaded Ukraine. But other countries are learning this lesson as well. Military readiness and spending are now top of mind in many NATO-allied nations. Countries like Germany are drastically increasing spending in response to new aggression. Germany spent just 47 billion euros ($51.1 billion) on defense in 2021, and it plans to spend 100 billion euros in 2022. It is also replacing some of its aging fighter-jet fleet with F-35 fighters made by Lockheed Martin (LMT -1.67%).
The engines for these fighters are provided by Pratt & Whitney, which is a division of Raytheon Technologies (RTX -1.75%). According to one source, Germany is by no means alone, with at least seven European nations pledging increased spending since the Russian invasion. Australia has selected both Raytheon and Lockheed Martin to help build guided missiles in an announcement made just days ago. These examples are likely just the tip of the iceberg given the developing geopolitical tensions.
It's this increased military spending that adds to the argument that Lockheed and Ratheon stocks have great potential to maintain (and even increase) their growth and dividend-paying potential in the coming years. Let's find out a bit more about these two dividend-paying stocks.
1. Raytheon Technologies
Raytheon Technologies was formed in 2020 out of the merger of Raytheon and United Technologies. The new company is structured with four major divisions: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense. The combined company generated more than $64 billion in sales in fiscal 2021 and over $5 billion in free cash flow.
The guidance calls for $69 billion in sales in 2022 and a 20% increase in free cash flow to $6 billion. This guidance was issued well before the war in Ukraine became a reality, so it is likely the company will exceed these estimates. The free cash flow should allow Raytheon to continue to increase its dividend ($2.005 per share in common stock dividends were paid in fiscal 2021).
Raytheon has an exceptional dividend history, with a cash payout every year since 1936. Before the merger, United Technologies had a dividend growth streak that stretched back to 1996. The dividend is currently yielding just over 2%. All indications are that the payout will continue to grow and provide income for investors into the foreseeable future.
2. Lockheed Martin
Not to be outdone, Lockheed Martin has been growing its dividend annually since 2003, and it has risen from $0.44 per share yearly to $10.60 in 2021. This is a tremendous compound annual growth rate of nearly 20%.
While we all sweat inflation, Lockheed Martin's increasing dividend is a terrific hedge. The most recent dividend increase was 7.7%, nearly matching the current inflation rate. The graph below illustrates the dividend growth since 2002.
The current dividend yield is a healthy 2.4%, but an investor who bought and held Lockheed Martin 10 years ago would have an effective yield near 13%. Buying five years ago would give the investor an effective yield today of over 4%. This is the essence of dividend growth investing. In these scenarios, both of these hypothetical investors would also have a tremendous pile of capital gains.
Lockheed Martin also returns capital to shareholders through stock repurchases. The most recent authorization is for $5 billion. The company produced over $9 billion in cash from operations in 2021, which was enough to easily cover the $3 billion paid out in dividends. Given its track record and secular tailwinds, it is overwhelmingly likely that Lockheed Martin will continue to provide investors with a growing dividend they can count on for years to come.