All It Takes Is $3,500 Invested in This High-Yield Dividend Stock to Generate $500 in Passive Income Over the Next 5 Years

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On Jan. 28, share prices of Lockheed Martin (NYSE: LMT) fell by 9.2%, marking the largest single-session drop since Oct. 26, 2021.

Defense contractors like Lockheed Martin are relatively safe dividend stocks because most of their sales are based on long-term contracts with the U.S. government. Unlike other industrial stocks, defense contractors' sales aren't as vulnerable to economic cycles. And their order backlogs can be viewed with a degree of certainty given the U.S. government's and its allies' abilities to make good on their payments.

The sell-off in Lockheed Martin pushed its forward dividend yield up to 2.9%. By investing $3,500 into Lockheed Martin, you can expect to generate more than $100 in annual dividend income, and likely more if the company continues raising its dividend, as it has done for 22 consecutive years.

Here's why Lockheed Martin is worth buying and holding for at least the next five years.

Image source: Getty Images.

An understandable sell-off

The most likely factors behind Lockheed Martin's sell-off are losses related to classified programs and disappointing financial projections.

Lockheed Martin reported $1.97 billion in write-offs from two classified programs in 2024, including $1.72 billion in the fourth quarter. One of the programs resulted in a $555 million hit to its aeronautics segment, while the other was a $1.41 billion loss in its missiles and fire control (MFC) segment. The MFC loss stings because the segment had been one of the fastest-growing and highest-margin aspects of the business. Lockheed Martin Chief Executive Officer James D. Taiclet Jr. said the following about the charge-offs during the company's fourth-quarter earnings call: "Recording charges in Q4 on these two programs enabled us to derisk the financial profile of both these critical national security programs going forward as we move into their next phases. While these particular contracts were struck a number of years ago, there are no longer any must-win competitions."

Factoring in the income tax benefit, the two classified programs resulted in a $6.16 earnings-per-share (EPS) reduction, dragging down Lockheed's full-year EPS to $22.31.

To make matters worse, Lockheed's 2025 outlook calls for lower earnings on an adjusted basis and just a 4.3% increase in sales on an adjusted basis. However free cash flow (FCF) is forecast at $6.6 billion to $6.8 billion, which would be the highest since 2021.

Data source: Lockheed Martin.

On the positive side, Lockheed Martin finished the year with a backlog of $176 billion -- a 9.6% increase from year-end 2023. Lockheed's backlog increased in all four of its business segments, which it expects can help drive growth this year. The company said it ended 2024 with a book-to-bill ratio greater than 1, which means it is booking more orders than it can fulfill -- a sign that demand is strong.

A key aspect of Lockheed's backlog are orders for its F-35 fighter jet. In December, Lockheed received an order for 145 F-35s. Worth $11.8 billion, or about $81.38 million per aircraft, deliveries will go to the U.S. Navy, Marine Corps, and Air Force, as well as U.S. allies Italy and Japan. On the fourth-quarter earnings call, Lockheed said its backlog for F-35s is now a staggering 408 aircraft. For context, Lockheed delivered 110 F-35s in 2024. There are different variants of the F-35, but based on the recent cost per aircraft, we can estimate that Lockheed's F-35 backlog alone is worth about $33.2 billion, illustrating how important the project is to Lockheed's future sales.

Lockheed Martin is a great value

The impact of write-offs from the two classified programs in 2024, paired with weak outlook for 2025, may lead investors to pass on investing in Lockheed stock, but it remains a great value for dividend investors. Lockheed's sales target for 2025 would be an all-time high. And the midpoint of its projection suggests business segment operating margin of 11%, which is right around Lockheed's average from 2022 and 2023.

What's more, Lockheed is a dirt cheap stock from a valuation standpoint and has an extremely affordable dividend. Based on the price of the stock at the time of this writing and the midpoint of 2025 EPS estimates of $27.15, Lockheed has a forward price-to-earnings ratio of just 17. Its forward dividend of $13.20 per share implies a payout ratio of less than 50% of net income -- giving Lockheed plenty of dry powder to reinvest in the business and repurchase stock.

Despite its sluggish growth, Lockheed has kept a tight lid on its valuation through consistent stock buybacks. During the past decade, Lockheed has reduced its share count by more than a quarter, boosted its dividend by 120%, and seen a 146% jump in its stock price. In 2024, Lockheed spent $3.7 billion on buybacks and $3.1 billion on dividends. So if the company didn't buy back stock and poured all of its capital return program into dividends, it could theoretically yield more than 6%.

Lockheed Martin is worth a closer look

The sell-off in Lockheed Martin stock is a buying opportunity for risk-averse investors looking to generate passive income. Lockheed isn't the flashiest or fastest-growing company, but it does have the qualities that make for a reliable dividend-paying value stock.

A strong backlog, underpinned by F-35 bookings, shows Lockheed is receiving more orders than it can process, adding stability to its forecasts.

Add it all up, and Lockheed is a solid safe stock to consider now.

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