These Two Defense Stocks Can Provide a Steady Stream of Passive Income
When it comes to building a passive income portfolio, dividend-paying stocks have long been a cornerstone for investors seeking reliable returns. However, not all dividend stocks are created equal. Some stand out as superior candidates for generating a steady stream of income, particularly those with conservative payout ratios. Research indicates that companies with payout ratios below 75% are less likely to cut or suspend their dividends, making them more dependable income sources. Stocks with even lower payout ratios—below 50%—offer an extra layer of security and room for future dividend growth.
In the aerospace and defense sector, two stocks shine brightly for passive income investors: Northrop Grumman (NOC) and Howmet Aerospace (HWM). Both companies boast conservative payout ratios, with Howmet’s well below the 50% mark and Northrop’s hovering near that critical threshold. This financial prudence suggests a solid foundation for ongoing dividend payments and the potential for substantial increases in the years ahead.
Northrop Grumman: A Passive Income Powerhouse
Founded in 1939, Northrop Grumman has established itself as one of the world’s largest defense contractors and a notable generator of passive income. The company’s diverse portfolio includes aircraft, defense systems, mission solutions, and space systems. With annual revenues projected to exceed $40 billion this year, Northrop Grumman is demonstrating robust growth in the aerospace and defense industry.
One of the standout features of Northrop Grumman’s stock is its solid passive income potential. Currently, it offers a yield of 1.58%, complemented by a five-year annualized dividend growth rate of 7.27%. The company maintains a conservative payout ratio of 49.8%, indicating ample room for future increases in passive income through dividend growth.
Northrop Grumman’s long-term growth prospects are bolstered by its involvement in critical military development programs, such as the Ground Based Strategic Deterrent program and the cutting-edge B-21 bomber. While the company’s revenue is heavily reliant on government defense spending—introducing an element of political risk—this risk is mitigated by the historical upward trend in global defense budgets. Northrop Grumman has consistently capitalized on this trend, delivering market-beating returns over time. With worldwide defense spending on the rise, the company appears well-positioned to maintain its strong performance.
Howmet Aerospace: A Renewed Focus on Dividend Growth
Howmet Aerospace is a leading provider of advanced engineered solutions for the aerospace and transportation industries. The company operates through four segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels.
Howmet Aerospace has recently made headlines with a remarkable 60% dividend hike, signaling a renewed focus on dividend growth. Currently, the company offers a modest yield of 0.33% with a highly conservative payout ratio of 8.44%. This low payout ratio suggests ample room for future increases in its quarterly cash distribution, making it an intriguing passive income play.
The business model of Howmet Aerospace is driven by the demand for its engine products and fastening systems from aircraft manufacturers, particularly as air travel demand surges. This strong market position has enabled the company to raise its full-year forecasts and increase its quarterly dividend in recent years.
However, it’s important to note that Howmet Aerospace has a history of cutting its dividend, having suspended it during the pandemic to preserve cash. Despite this past setback, the recent dividend hike and improved outlook signal a potential return to robust dividend growth, making it a stock worth considering for passive income investors.
Two Top Passive Income Candidates
Both Northrop Grumman and Howmet Aerospace emerge as attractive candidates for a passive income portfolio. These two defense stocks offer a compelling blend of current yield, dividend growth potential, and sustainability—three key traits that characterize the best passive income stocks.
With their conservative payout ratios and strong market positions, these companies not only provide a steady stream of passive income but also present opportunities for long-term growth. For investors looking to enhance their passive income strategies, Northrop Grumman and Howmet Aerospace are certainly worth a closer look.