How would you like to be paid simply for owning a company's stock? Well, when you invest in a company that pays a dividend, that's what happens. In fact, investing in dividend stocks is a great way to earn passive income and finance your future. Of course, it's important to choose the right dividend stocks, and there are definitely key things to look for before purchasing. So, without further ado, here are three great dividend stocks for beginning investors, and why they could make great investments. Today we'll be focusing on the defense industry.
3 top stocks
When it comes to investing in stocks, there are a number of things to watch for in terms of dividends, but four are arguably the most important:
- The payout ratio -- How much of a company's cash flow is going toward paying out the dividend.
- The current yield -- Used to calculate the relative attractiveness of dividend-paying stocks; dividends per share divided by current share price, which shows how much cash flow you're getting for your investment.
- Dividend growth -- How long a dividend has grown.
- Annual payout -- How much money you get annually per share.
When it comes to defense giants, no one beats Boeing. It has a market cap of almost $98 billion, and a massive backlog of $489 billion, according to its latest quarterly report -- $430.8 billion from commercial plane sales, and $48.4 billion from defense.This is important because the government awards contracts for products that often take defense companies years to develop and then sell to the government. Then, as work is performed and/or deliveries are made, the company bills the government, the government pays the bill, and that amount is recorded as a sale. In brief, backlog is important because it reflects future work; the bigger the backlog, the better.
In addition to the above, Boeing projects a need for 38,050 airplanes globally over the next 20 years, at a value of more than $5.6 trillion. Yes, trillion. Considering Boeing is one of the top producers of commercial airplanes, this is great news for long-term investors. More good news? Although Boeing's backlog is largely comprised of commercial airplane orders, thanks to defense contracts like the KC-46A Tanker, Boeing is also the second-largest defense contractor in the world if you just consider defense revenue. Plus, Boeing pays a healthy dividend.
As of this writing, Boeing's payout ratio is 45.7%, meaning its dividend is sustainable and has room to grow (you want to watch for a payout ratio that's below 100%; the lower it is, the more room it has to grow sustainably). Its current yield is 2.52%, which is above the Aerospace/Defense Products & Services Industry average of 1.83%. Plus, it's grown its dividend for three consecutive years, with annualized growth for the last three years of 20.2%. Finally, its annual payout is $3.64 per share. Simply put, when it comes to investing in a solid, dividend-paying company, Boeing could be a great bet.
Although it's not as big as Boeing, General Dynamics is by no means small. In fact, General Dynamics' market cap is $49.02 billion, and its total backlog is $70 billion, according to its latest quarterly report. Plus, General Dynamics is one of the few companies out there that builds Navy ships. Indeed, General Dynamics has two marine system businesses: Bath Iron Works, a full-service shipyard that builds ships like the Arleigh Burke-class (DDG 51) and Zumwalt-class (DDG-1000) guided-missile destroyers; and Electric Boat, which is the prime contractor for the Virginia-class submarine program, and is leading the development for the Ohio-class Replacement, the third-generation ballistic-missile submarine. Furthermore, these marine systems are incredibly lucrative -- in 2014, nuclear submarine sales brought in $4.3 billion in revenue, and surface combatants (like the destroyers) brought in almost $1.1 billion -- and account for a large portion of General Dynamics' total backlog. In its latest quarterly report, Marine Systems accounted for almost $29.4 billion of General Dynamics' total backlog, while the next highest business segment, Combat Systems (this includes things like the Abrams tank, light armored vehicles, artillery, etc.), accounted for $19.4 billion.
Even better? General Dynamics also offers an impressive dividend. As of this writing, General Dynamics' payout ratio is 31.4%, meaning its dividend is sustainable and has a ton of room to grow. Its current yield is 1.85%, which is slightly above the Aerospace/Defense Products & Services Industry average of 1.83%, and General Dynamics has grown its dividend for 17 consecutive years, with annualized growth over the last three years of 9.8%. Furthermore, it has an annual payout of $2.76. Clearly, this is a company with a solid future thanks to its strong backlog, and an attractive dividend. As such, it could make a great investment for beginning investors.
When it comes to overall market cap and backlog, Boeing has the upper hand of this bunch, thanks to its impressive commercial airplane segment. However, if you just compare defense revenue, Lockheed Martin is the biggest defense company in the world -- in 2014, Lockheed Martin had over $40.1 billion in defense revenue, compared to Boeing's $29 billion. More important, Lockheed Martin has a number of things going for it. It has a market cap of $64.31 billion, a backlog of $80.5 billion according to its latest annual report, and it's the prime contractor for one of the biggest defense contracts ever -- the F-35 fighter plane. As if that's not enough, Lockheed Martin's dividend is outstanding.
As of this writing, Lockheed Martin's payout ratio is 53.2%, which is higher than Boeing's or General Dynamics', but is by no means unsustainable, and still has room for growth. Lockheed Martin's current yield is 2.90%, which is a fair amount above the Aerospace/Defense Products & Services Industry average of 1.83%, and it's grown its dividend for 12 consecutive years. As if that's not enough to entice you, Lockheed Martin's annualized dividend growth over the last three years is 19.1%, and its annual payout amount is $6. In other words, if you're looking for a company with a strong future thanks to its significant backlog, and an attractive dividend, Lockheed Martin should be a consideration.
Investing in the future
When you first get started with investing, it can seem overwhelming. However, dividend stocks are a great place to start, especially if you know what to look for. Moreover, investing in dividend stocks is an excellent way to earn passive income. Of the three companies listed, General Dynamics is my personal favorite. It has solid financials -- in its latest quarterly results, it reported $7.9 billion in revenue, which was an increase of 5.5% compared to the same quarter last year -- has a backlog of $70 billion, pays a healthy dividend, and its dividend has a ton of room to grow. To sum it up, if you're a beginning investor, I'd give all three companies a closer look, especially General Dynamics.
Katie Spence has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.