3 Dividend-Paying Defense Stocks to Buy in February That Yield More Than the S&P 500

The defense industry provides a range of products for national security, from aviation and aircraft to missiles, helicopters, information technology, ships, space defense, and more. Unlike most of the industrial sector, defense stocks tend to be steady performers thanks to their sales cycle, which relies on government contracts and projects with multi-year timelines.

Many defense stocks also pay quality dividends, especially relative to the S&P 500 (SNPINDEX: ^GSPC), which yields an average of just 1.2%.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

U.S. defense contractors Lockheed Martin (NYSE: LMT) and L3 Harris Technologies (NYSE: LHX), as well as British sensor and information product company Chemring Group (OTC: CMGMY) (OTC: CMGMF), yield the average of stocks in the S&P 500. Three Motley Fool contributors were asked to explain why these three dividend stocks are worth buying now. Here's what they had to say.

Image source: Getty Images.

A value play in the defense industry

Daniel Foelber (Lockheed Martin): Defense contractor Lockheed Martin has given up all of its 2024 gains. The stock price is now roughly the same as it was five years ago.

There are several valid reasons for the sell-off. Lockheed reported steep losses from classified programs in 2024 -- which crushed its operating margin. As you can see in the following chart, Lockheed's revenue growth has been fairly poor for several years now, and its operating margin has been declining leading up to the classified program charge.

Data by YCharts.

In its fourth-quarter earnings release, Lockheed provided weak 2025 guidance, projecting just 4.3% year-over-year revenue growth and lower adjusted earnings per share. Operating cash flow and free cash flow are expected to increase at respectable rates. But still, the company simply isn't growing quickly -- and hasn't been for some time.

Despite all the negatives, Lockheed still has much going for it as a solid long-term investment opportunity. For starters, its guidance tends to be highly accurate because projects are contracted in advance, and Lockheed has a massive $176 billion backlog -- which is more than double its annual revenue. Its customer base (the U.S. government and its allies) is reliable no matter what the economy is doing. This characteristic makes Lockheed one of the more consistent performers. Last year's classified program write-off is about as funky of a curveball as you'll get from Lockheed.

Lockheed's slow growth has arguably already been factored into its valuation. Based on 2024 adjusted earnings per share of $27.99 and a share price at the time of this writing of $444.39, Lockheed has an adjusted price-to-earnings ratio of just 15.9. That's an excellent value for an industry-leading business.

On their own, Lockheed's consistent mediocrity and inexpensive valuation wouldn't be compelling enough reasons to own the stock long-term. But throw in a 3% dividend yield, and the investment thesis becomes a lot more interesting.

Lockheed has raised its dividend for 22 consecutive years. And over the last few years, the dividend growth rate has outpaced Lockheed's stock price -- leading to a higher yield. Add it all up, and Lockheed stands out as a top value stock to buy now.

A strong backlog is just one reason why L3Harris Technologies stock looks attractive right now

Scott Levine (L3Harris Technologies): With roots that reach back to the end of the 19th century, L3Harris Technologies has developed into a leading defense contractor, providing militaries with cutting-edge solutions for uses in various combat settings. In addition to the company attracting attention from governments looking to gain strategic advantages, L3Harris Technologies stock attracts interest from income investors looking to fortify their passive income streams with the stock's 2.2% forward yield -- especially considering the company's 23-year streak of hiking the payout.

After a strong 2024 financial performance that includes a 10% year-over-year increase in revenue and a 22% year-over-year increase in operational cash flow, L3Harris Technologies began 2025 well positioned to continue its success. For one, L3Harris Technologies began the year by growing its backlog to $34 billion -- a company record. The company, moreover, has made unexpectedly quick progress on its strategy to expand profitability.

In the fourth-quarter 2024 press release, CEO Chris Kubasik recognized that as a result of the "LHX NeXt initiative, we exceeded our cost-savings target for 2024, achieving $800 million, and are raising our overall cost-savings goal to $1.2 billion by the end of 2025, a year ahead of schedule."

While the strong backlog and improving financials are positive signs, income investors will find other indications that the company's dividend is on solid ground. Besides, with L3Harris Technologies averaging a conservative payout ratio of 73% over the past five years, the company has consistently generated ample free cash flow from which it can source the dividend.

Data by YCharts.

With shares of L3Harris Technologies trading at 14 times operating cash flow, a discount to their five-year average cash-flow multiple of 18.2, now looks like an especially good time to click the buy button on L3Harris Technologies stock.

A rare value in the defense sector

Lee Samaha (Chemring): Enterprising investors willing to look further afield for a dividend-paying stock exposed to the growth areas of defense spending might consider British defense stock Chemring. The company is the world leader in countermeasures to protect air and sea defense assets from guided missile attacks and energetics (materials that store chemical energy released during explosions). It's also a leader in sensors and information systems that detect biological, chemical, radio, and cyber threats.

These areas have come to the forefront of recent conflicts involving combatants in an electronic security arms race. It's also why the NATO supplier reported a record order book of about 1.04 billion pounds ($1.3 billion) at the end of its financial 2024.

The strength in its order book and ongoing demand for defense spending gives management confidence to target doubling its revenue from 510 million pounds in 2024 to 1 billion pounds by 2030. Trading at 16.2 times underlying diluted earnings per share (which excludes gains or losses on derivative instruments) for 2025 and sporting a 2% dividend yield, Chemring is a rare value in the defense industry. Moreover, according to management, investors should note that Chemring suffered some "severe weather impacting operations at some of our manufacturing sites" in the first half of 2024. Without this impact, its earnings in 2024 might have been better.

With 77% of 2025 revenue already covered by the order book and ongoing demand for its solutions, Chemring is well placed to benefit from the need to ramp up defense spending in line with heightened geopolitical tensions.

Should you invest $1,000 in Lockheed Martin right now?

Before you buy stock in Lockheed Martin, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Lockheed Martin wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $795,728!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

Learn more »

*Stock Advisor returns as of February 7, 2025

Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.