The Best Dividend Offense Is a Good Defense Stock

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Lockheed MartinIn 2011, the S&P 500 Index of America's biggest companies went precisely nowhere. In fact, if you bought the index just before close of the last trading day of 2010, and checked its performance after the closing bell on Dec. 30, 2011, you'd have found your investment lost $0.04 per share.

It didn't have to be that way. Just because a company's stock price doesn't go up, doesn't mean it can't generate profits. Investors who buy shares in companies that pay a quarterly dividend, for example, can make good money even when their shares don't budge an inch.

Right now, the average stock on the S&P 500 pays its shareholders a 2% dividend yield (that's the dollar amount of the dividend, divided by the stock price). The more exclusive Dow Jones Industrial Average, composed of the 30 most important names in the country, is more generous, paying an average 2.6% dividend yield.

But you can do even better than that.

Defend Your Portfolio With Dividends

Perhaps the most hated sector of the stock market today is the one inhabited by "defense stocks." Soaring deficits in a weak economy, gridlock in Congress, and the end of one foreign war and the winding down of a second all combined to make 2011 a bad year to own defense stocks.

But there's an upside, too: While many defense stocks underperformed last year, they still maintained their dividends, and in many cases increased them. As a result, defense companies have become some of the biggest dividend payers on Wall Street.

Most defense stocks today pay better dividends than the Dow average. But the four names below do even better than that. As a group, their dividend checks average 3.9%, a whopping 50% bigger than the payout on the Dow.

Company

Forward P/E

5-Year Annual Growth Rate

Dividend Yield

Lockheed Martin (LMT)

10.6

9.1%

4.9%

General Electric (GE)

11.8

13.4%

3.8%

Raytheon (RTN)

9.4

9.0%

3.6%

Northrop Grumman (NOC)

8.7

7.9%

3.4%


Defense, With an Underrated Offense

Right off the bat, earning a 3.9% dividend looks attractive in a world where the average stock produces no profits, and the average bank account pays only token interest rates on customer deposits. But wait -- this story gets even better.

In addition to mailing you a check, quarter-in and quarter-out, in good times and bad, the four stocks named above also offer better-than-average chances of rising in value in 2012. All four of these companies currently sell for lower multiples to this year's expected earnings than the average stock on the Dow index. If you throw a dart at the index, chances are any stock ticker you hit will cost you about 13 times estimated earnings. That sounds cheap, but the most expensive stock on the above list (General Electric) is 9% cheaper than that, while the cheapest (Northrop) costs 33% less than the going rate on the Dow.

At the same time, these firms' projected growth rates are on par with the 9% projected pace for Dow stocks as a whole. However, growth estimates for defense stocks are are a whole lot more reliable than analyst estimates for flightier tech stocks. (Guessing the right growth rate for Apple, for example, requires knowing whether consumers will prefer iPhones over Android clones in 2012, whether Research In Motion will make a comeback, and how Microsoft will do as it enters the smartphone market.)

But defense stocks? If you're the U.S. government and you find you need to buy a fifth-generation stealth fighter jet, who are you going to buy it from? Lockheed Martin, of course -- because it's the only company in the U.S. that makes fifth-generation stealth fighter jets. Similarly, if you're in the market for a missile, chances are you'll buy it from Raytheon. You probably buy your Global Hawks from Northrop Grumman, and your jet engines from General Electric or United Technologies' Pratt Whitney. To top it all off, you publicly announce your plans to buy all these gadgets -- and publicly state how much you'll pay for them -- in widely covered congressional appropriations acts, often published years in advance of the sales actually taking place.

The Safest Way to Invest

Combining generous, reliable dividends and modest, but highly predictable growth rates, investing in defense stocks offers you a great, defensive way to position your portfolio for 2012.

Motley Fool contributor Rich Smith does not own shares of any company named above, but The Motley Fool owns shares of Lockheed Martin, Raytheon, Northrop Grumman, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft.



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bdyftns

G.E.? Seriously? How much do they owe the government in bailout money? GE, Really?

January 04 2012 at 6:31 PM Report abuse +1 rate up rate down Reply
Master of my fate..

I have read several places that reinvested dividends account for 40% of the S&Ps growth over the long term.
Classic case of the Hare vs. the Turtle in a race. The Hare will win the sprint, the Turle will win the long race.

January 04 2012 at 12:32 PM Report abuse rate up rate down Reply
jking41198

I began investing in dividend stocks 47 or 48 years ago. I did not have exposure to one stock that tumbled in the 2008 period. In general, low PE, high dividend stocks will make you a lot more money in the long run.

January 04 2012 at 12:19 PM Report abuse rate up rate down Reply