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Nearing Retirement? The 3 Best Defense Dividend Stocks to Buy Now

Motley Fool - Tue Jan 3, 2023

The United States has been the world's biggest spender on defense for decades. Ongoing geopolitical tensions with Russia and China have encouraged further political support of national security investments; Congress recently approved the 2023 National Defense Authorization Act, a defense bill that puts spending at $858 billion for this upcoming year, an 8% increase over 2022.

That's a lot of money and an opportunity for investors to benefit from the government's colossal spending bill. If you're nearing retirement, consider these defense stocks. In addition to decades-long histories of working closely with the United States government and paying steadily growing dividends, both have large government programs that will create growth in the coming years.

1. Lockheed Martin

Defense and aerospace company Lockheed Martin(NYSE: LMT) has a huge role in supplying advanced weapons and equipment to the U.S. military. Lockheed builds some of the military's most famous tools, like Black Hawk helicopters and F-35 fighter jets. The U.S. Pentagon estimates the F-35 program will cost more than $400 billion in aircraft and $1.3 trillion to operate and maintain the fleet.

Lockheed Martin's widespread presence throughout the military signals solid growth prospects; analysts believe the company's earnings-per-share (EPS) will grow by an average of 6% annually over the next several years.

LMT Revenue (TTM) Chart

LMT Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Retirees can lock in a 2.5% dividend yield at today's share price. That's not massive, but the company has a 20-year streak of increasing the payout. The dividend payout ratio is modest at 35% of cash profits, so Lockheed Martin could be an excellent stock that combines a solid starting yield with plenty of room for increases over the coming years.

2. Northrop Grumman

An industry peer to Lockheed Martin, Northrop Grumman(NYSE: NOC) also plays a crucial role in supplying cutting-edge technology to the United States government. The company's space segment is its most prominent business, dating back to America's earliest space efforts, like the Lunar Module that landed on the moon.

You can see below that Northrop Grumman's revenue has been choppy throughout its history, but growth should soon push the company to new heights. Northrop Grumman is building the B-21 stealth bomber, the military's next-generation stealth aircraft -- a project that could cost more than $200 billion into the 2050s.

NOC Revenue (TTM) Chart

NOC Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Northrop Grumman is building its dividend growth track record, which currently stands at 19 years of consecutive increases. Analysts expect EPS to grow by 3% annually over the next three to five years, which could pick up as the B-21 program advances. Investors can get a 1.3% dividend yield, and the payout ratio is only 19% of net income. It seems likely that Northrop Grumman's future as a dividend stock will be bright.

3. Raytheon Technologies

After a merger with United Technologies in 2020, aerospace and defense company Raytheon Technologies(NYSE: RTX) has a fresh look. The company boasts four primary business segments, from military vehicles and missile defense to its Pratt & Whitney brand, which builds aircraft engines. Raytheon's relationship with the military remains strong; it makes a range of weapons for the government, and its aircraft engines are found throughout the armed forces and commercial airlines.

The company has resumed growth after its 2020 shake-up, including booking 32% more than it billed in the third quarter of this year and 5% to 6% expected revenue growth for the entirety of 2022.

RTX Revenue (TTM) Chart

RTX Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Raytheon is an established dividend stock; management has raised the dividend for 29 straight years, though the 2020 spinoff of Otis Worldwide and Carrier Glboaltechnically reduced the dividend (cumulatively, an investor's share of Raytheon's, Otis', and Carrier's dividends made up for the cut at Raytheon). It offers a 2.2% dividend yield at the current share price, and the payout ratio is manageable at 69% of net income. Analysts are looking for annual EPS growth of 9% over the next three to five years, which should power solid dividend growth for the immediate future.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

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