Dividend Investing Ideas Center
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Dividend Investing Ideas Center
Jared Cummans Jan 30, 2015
One of the most important factors for every dividend investor is the reliability of a particular investment. A security that is able to consistently and reliably make distributions is typically favored by those investing for the long term. One source of stability for a number of stocks is enjoying the U.S. government as a customer. Arguably among the most reliable customers in the world, the government has a big influence on a number of big-name dividend payers, leading to some of the most reliable stocks in the world.
Below, we outline five dividend stocks that are heavily reliant on the U.S. government, typically the Department of Defense (all data taken from 2013 10-K reports):
The Chicago-based plane maker derived 67% of its 2013 revenues from U.S. government contracts. Upon first glance, most investors know Boeing as a major producer of commercial airliners, but the company has even greater ties to the government. Aside from its commercial products, Boeing produces military aircraft, satellites and missile defenses.
General Dynamics is based in Falls Church, Virginia, and is best known for business-jet aircraft and aircraft services, But the company has heavy ties to the government as well, producing military vehicles, weapons systems, and munitions, which attracted 62% of its revenues from the domestic government. The company also raked in 7% of its revenues from international defense customers [see also The Ten Commandments of Dividend Investing].
The New York City-based L-3 Communications provides a wide variety of aerospace and defense products for governments and other contractors. More specifically, the company on surveillance and reconnaissance equipment, as well as aircraft modernization and maintenance. L-3 saw 73% of its 2013 sales come from U.S. government contracts.
Perhaps the best-known company for its ties to the U.S. government, Lockheed Martin produces a barrage of products and systems for defense and military use. 82% of its 2013 sales were from government contracts with 61% stemming from the Department of Defense.
Raytheon divides its output into four segments: Integrated Defense Systems, Intelligence Information and Services, Missile Systems, and Space and Airborne Systems. The company saw 72% of its revenues come from U.S. government spending, with another 13% coming from foreign governments [see also The Visual Guide to Long-Term Wealth Accumulation].
There are a handful of advantages and drawbacks to heavy reliance on the government. On one hand, the U.S. government is the largest in the world and arguably the most stable, making it a good long-term customer. There will always be a need for defense spending and most likely a need for military spending as well.
On the other hand, politics can wreak havoc on the stability of these investments. Different political parties have different ideas on how to allocate to Defense and Military, so a shift in Washington could infect the Street (of course this could also work in favor of the companies). The 2013 government shutdown is something of a concern, as investors do not want to see their security reliant on an institution that is in danger of collapsing every so often simply because politicians cannot get along. Finally, the biggest risk comes from any kind of competition; should the government find a better deal or product elsewhere, withdrawing their sales from any one of these companies would literally collapse their prices.
Hefty government contracts can be a good sign when it comes to finding a reliable stock, but it is certainly not the only attribute that investors should take into account. Here are some resources to help you find a reliable dividend payer:
There are arguments for both sides when it comes to government reliance. Either way, investors who make a long-term play on these stocks will need to keep their eye on politics and any kind of shifts in the spending habits of the U.S. These stocks have the potential to be long-term solid dividend payers (LMT has increased its dividend for 11 straight years, for example) but they are also at the mercy of the whims of the U.S. government. As always, do your homework before making an investment.
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