Over the past 100 years, the stock market has proved that one of the best things you can do with your money is buy dividend stocks. Study after study shows dividend stocks outperform non-paying ones by healthy margins, and even when the market was generating losses, income-producing stocks still gave investors positive returns.
Data from Hartford Funds shows that there has never been a single decade where dividend stocks in the S&P 500 lost money. Even during the so-called "lost decade" of the 2000s when the Tech Wreck, 9/11, and the collapse of the housing and financial markets conspired to cause the S&P 500 to decline, dividend stocks showed modest gains.
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Dividends are a vote of confidence that the long-term growth story of the business remains intact while softening the blow of any lack of capital appreciation. But what if you can get dividend growth and capital appreciation, even during a recession that experts increasingly think will strike early next year?
That's a potent combination any investor would be interested in, and it's why I think Raytheon Technologies (RTX 0.68%) is a stock that will easily beat the Dow Jones Industrial Average for many years to come.
Best defense is a good offense
Raytheo is the second-largest defense contractor behind industry behemoth Lockheed Martin, created as a result of a merger of equals between Raytheon and United Technologies in 2020. United was the surviving company and had paid dividends every year since 1936, then changed its name to Raytheon Technologies.
Defense stocks, in general, can often be a good bet. Military spending is rarely ever cut, providing a reliable revenue source. What makes Raytheon a better choice than Lockheed is that it is much more diversified than its rival.
Whereas virtually all of Lockheed's revenue comes from government contracts, less than half, or 48%, of Raytheon's annual revenue is tied to the U.S. government. It also possesses robust commercial aviation operations through its Collins Aerospace division. In aerospace, it develops avionics and communications, electric power generation, flight control, air data and sensing systems, and even food and beverage prep.
While Collins does serve the military and makes space suits and sensors for astronauts, its biggest commercial customers are Boeing and Airbus. Combined, the two plane makers represent 18% of Raytheon's total revenue in 2021.
Yet the reason you'd want to invest in Raytheon is because of its defense contractor status, both for the U.S. military and foreign governments. And though that typically will always be a growth business, there are certain factors coming into play that will make Raytheon an unstoppable dividend stock.
Rebuilding the stockpile
There's no question Russia's invasion of Ukraine has altered geopolitical calculus, but for Raytheon it represents an unprecedented opportunity.
Using many of Raytheon's missile and weapons defense systems, the Ukrainian army has stymied Russia's ability to make significant advances in Ukraine. For example, Ukraine's effective use of Javelin antitank missiles has impeded Russia's advance and led to retreat across several fronts. Javelin's were jointly developed by Raytheon and Lockheed.
Ground troops have also deployed Raytheon's Stinger antiaircraft missiles with great success.
In fact, Raytheon CEO Gregory Hayes just said at a forum at the Ronald Reagan Institute: "We've essentially used up 13 years worth of Stinger production and five years worth of Javelin production. So the question is, how are we going to resupply, restock the inventories?"
Image source: Raytheon Technologies.
Growth and income
While it's not known how much such contracts will be worth, restocking the U.S.'s arsenal, as well as rearming numerous countries around the globe, ensures that Raytheon will have a multibillion-dollar backlog of business for years to come.
Earlier this year, Raytheon was awarded a $624 million Stinger contract for 1,300 Stinger missiles to help begin replenishing supplies, and just this month it and Lockheed were named as principal contractors in a $380 million deal for 350 Stingers for Finland.
Both companies were also awarded a $311 million contract for Javelin missiles in September for Jordan and Lithuania and previously had been given a contract for $309 million for Javelins for Norway, Albania, Latvia, and Thailand.
These contracts alone were worth $1.6 billion and should help take care of capital appreciation for investors, while its $2.20-per-share dividend, which currently yields 2.2% annually, will provide income.
Dividend royalty without the crown
United Technologies was also a Dividend Aristocrat, or a company that's increased its payout for 25 years or more, but its status was not extended upon completion of the merger. Neither elevator maker Otis Worldwide nor HVAC specialist Carrier Global, which were spun out into separate businesses at the time, got the designation either.
Earlier this year Raytheon hiked its payout 7.8%, which would essentially have been United's 29th consecutive year of increases.
Raytheon's stock is up 17% in 2022 and some 27% above the lows hit back in September. At 33 times trailing earnings, more than twice its sales, and an enterprise value-to-free cash ratio of 44, it's not at its cheapest valuation. Even so, the defense stock represents a good dividend play that should benefit from the long-term restocking of America's arsenal.
