Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Lockheed Martin Corporation (LMT), The Boeing Company (BA): Defense, Dividends, and Sequestration: What Investors Need to Know.

Building my Dividend Porfolio - Lockheed Martin (LMT)So, sequestration happened. While that’s not great, and it could definitely make things interesting for a while, one sector I’m not too concerned about is defense contracting, specifically defense giants. Yeah, it’ll be bumpy, but they’ll survive. They’re the proverbial tortoise: slow and steady. So why do investors invest in them? Dividends. And, understandably, there’s concern over what, if any, impact sequestration will have on defense dividends. Here’s what you need to know.

Dividends are paid from net income. In other words, the cash that’s left after taxes, expenses, etc. So, for example, let’s say Lockheed Martin Corporation (NYSE:LMT) takes a hit in its profit because the government isn’t spending as much money. In theory, that could impact its dividend. Well, sequestration will definitely impact defense companies’ profits, so does that mean defense dividends will take a hit? Unlikely, and it’ll probably be minimal if they do. Here’s why:

Lockheed Martin Corporation (NYSE:LMT), The Boeing Company (NYSE:BA) , Northrop Grumman Corporation (NYSE:NOC) , Rockwell Collins, Inc. (NYSE:COL) , and United Technologies Corporation (NYSE:UTX) , all pay dividends, which is great for investors. Even better? Their dividend payout ratio is pretty low, and because of that, sustainable even if affected by sequestration. Take a look: Lockheed Martin Corporation (NYSE:LMT)’s payout ratio is the highest at 50%, and United Technologies’ is second at 38%. The Boeing Company (NYSE:BA) and Rockwell are tied for third with a payout ratio of 34%, and Northrop has the lowest payout ratio, at 28%.

Another factor to keep in mind? While sequestration does mean a reduction in defense spending, it’s only returning defense spending to 2007 levels. In other words, there’s still a heck of a lot of defense spending going on, so these companies aren’t going to see all their revenue vanish overnight. Go down? Yes. Dry up? Nope. What’s more, these companies’ market caps are in the billions. They’re not small companies that can’t take a little turbulence. That’s not to say they won’t be affected; they undoubtedly will be. But they’re resilient.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.