LMT - 3 Strong Dividend Stocks To Own

• Johnson & Johnson reported solid earnings and is gearing up to spin off its pharmaceutical and medical devices segment from its traditional consumer health segment.
• Lockheed Martin continues to win new defense contracts as many countries around the globe are looking to upgrade their military after Russia invaded Ukraine.
• Bank of America reported very strong NII growth driven by rising interest rates, which should continue to be a growth driver for the foreseeable future, fueling the rising dividend.

The stock market has been a place of pain for many of us in 2022, but now we embark on one of the most important weeks of the year. We will be hearing the latest earnings reports from some of the largest companies within the S&P 500.

We will be hearing from the likes of Apple ( AAPL ), Alphabet ( GOOGL ), Meta Platforms ( META ), Amazon ( AMZN ), Microsoft ( MSFT ), and AbbVie ( ABBV ) just to name a few.

The S&P 500 is down over 17% entering the week, but we have seen a bounce the past week. Is this a dead cat bounce or could we be seeing the bottom forming to start a new bull market? Volatility could be high with so much riding on this week's earnings results.

With that being said, I am taking a wait and see approach. If we get a market sell-off, I have a list of dividend stocks that I will be adding to on any pullback.

Today, we will be looking at three dividend stocks that reported positive earnings last week. All three of these dividend stocks have a strong dividend growth record.

Dividend Stock #1 - Johnson & Johnson ( JNJ )

Johnson & Johnson is a dividend stock that is known around the world not only for their products, but also for their dynamic dividend track record. JNJ has now increased their dividend for 60 CONSECUTIVE years now after recently hiking the dividend 6.6% back in April.

In mid-November, Johnson & Johnson announced that they would be splitting the business into two separate businesses. It was something that I did not expect, considering Johnson & Johnson has been, which it is, since 1886.

Johnson & Johnson currently operates the company with three separate segments:

1. Consumer Health
2. Pharmaceutical
3. Medical Devices

During the company's most recent quarterly report , these segments reported the following revenues:

1. Consumer Health = $3.8B
2. Pharmaceutical = $13.3B
3. Medical Devices = $6.9B

Sales grew 3.0% during the quarter, but were severely impacted by currency headwinds, which negatively impacted the business by 5.0%.

In terms of the split, the legacy consumer health business, which contains many of the well-known JNJ brands will be spinning off on its own. The consumer health segment owns brands such as: Band-Aid, Listerine, Aveeno, Neutrogena, and Tylenol among other products.

Management believes that by splitting up the businesses, this will allow the individual businesses to focus more about growth opportunities on a standalone basis that would provide even more value to shareholders. The transition is expected to close in 2023.

Currently, analysts are calling for JNJ to finish the year with adjusted EPS of $10.08, which equates to a forward P/E ratio of 17.1x. Over the past five years (blue line), shares of JNJ have traded at an average P/E multiple of 17.6x. As such, shares do seem fairly valued at current levels.

JNJ is a dividend staple and about as consistent as they come. Any pullback in the stock will allow me an opportunity to add shares of this Dividend Aristocrat.

Dividend Stock #2 - Lockheed Martin ( LMT )

The second dividend stock worth owning on any pullback this week is defense contractor Lockheed Martin. Unlike the greater market, defense names have enjoyed a positive year so far in 2022.

Here are the YTD results for defense contractors:

((LMT)) Lockheed Martin: +11.4%

( RTX ) Raytheon Technologies: +8.3%

( GD ) General Dynamics: +4.5%

( NOC ) Northrop Grumman: +17.2%

The defense sector has enjoyed an uptick in defense spending across the globe, not only here in the US, but also our allies around the world.

Defense spending here in the US is projected to reach $778 billion, which is a record.

The Russia/Ukraine war has led many countries to re-think their military spending, which has definitely helped these US defense contractors here in 2022.

Lockheed Martin has many different products, but some of their most popular products are their F-35 fighter jets. The company also has the Sikorsky helicopters, which is a company they acquired back in 2015.

Just this past week, the US government agreed to have LMT build another 375 F-35 fighter jets, which will roll out over the next three years. The agreement is worth an estimated $30 billion to start.

The company continues to win new defense contracts that pay over a number of years. The company has turned these contracts into strong cashflows over the year, which helps feed the dividend.

Shares of LMT pay an annual dividend of $11.20, which equates to a dividend yield of 2.84%. Over the past five years, LMT shares have a dividend growth rate of 9.1%. All of this is well covered by earnings, as shares of LMT have a dividend payout ratio of only 40%.

Currently, shares of LMT trade at an earnings multiple of 17.8x, which is slightly above their five-year average of 17.1x.

Lockheed Martin issued Q2 results last week that were largely underwhelming as they missed on both the top and bottom line. Management has guided to a slowdown in 2023 is to be expected before many of its current contracts begin to ramp up again.

A pending recession could impact any business, but looking back at 2008, shares of LMT actually performed pretty decent given the circumstances and outperformed the S&P 500 during that time.

I expect defense spending to continue to climb and more new contracts to be awarded given the state of the Russia/Ukraine war, which should directly impact LMT and eventually its shareholders in the form of rising dividends.

If we see any sizable pullback in shares of LMT, I will happily add to my position.

Dividend Stock #3 - Bank of America ( BAC )

The final stock hails from the financial sector. As you are probably aware, bank stocks got the earnings season underway last week, with what many called the tale of two tapes.

On one end you had the doom and gloom report from JPMorgan ( JPM ), racking up large amounts of credit reserves.

On the other end, the likes of Bank of America, Citigroup ( C ) and Wells Fargo ( WFC ) report nice earnings with much less concern about credit. In fact, they reported that credit issuers have not had a problem to this point, even with the slowdown in the economy.

Revenue for BAC in Q2 was up 5.7%, but barely missed analyst expectations. Net Interest Income, or NII, was the bright spot for the company, as it was up $2.2 billion or 22% year over year.

This was largely driven by higher interest rates, as it is the difference between the interest they can receive from loans handed out and the interest they pay out for customer deposits.

Bank of America has a huge loan portfolio and they are one of the banks that is most sensitive to rate hikes. Given that, rate hikes should continue to be a huge tailwind for the company in the short-term.

The bank also saw strong consumer spending during the quarter with deposits increasing, suggesting, from their standpoint, that the consumer remains in good shape.

The black eye for the BAC report was similar to other banking institutions, and that was centered around investment banking, which has seen declines due to poor market performance.

On one end, rising interest rates will be a tailwind for the company, but it will also put pressure on loan growth. Last month, we saw the largest number of home sales cancellations, largely due to rising costs around homeownership. Home prices still remain elevated, although we are starting to see some cracks, and interest rates are rising at a fast pace.

Depending on whether we fall into a recession or not, any further declines in the stock market will also put added pressure on the company's investment division, so be mindful of that as well.

BAC has been a strong dividend growth stock to own over the years. In fact, they pay a $0.88 per share dividend, which yields 2.5%. Over the past five years, BAC shareholders have enjoyed a dividend growth rate of 22.9%, which is amazing. However, the most recent increase was 5%, which is more than likely the company being cautious as we enter a possible recession.

In terms of valuation, shares of BAC trade at an earnings multiple of 9.9x, which is well below their five-year average multiple of 14x. I have recently added to my position and will continue doing so on any pullback.

Investor Takeaway

In addition to a massive week of earnings, we will also be hearing from the Federal Reserve in which they are expected to hike rates another 75 basis points, as they continue to fight inflation.

The key is to perform your due diligence early, so that when the market does react, you are ready and have a game plan on how to attack.

All three of these dividend stocks not only have a history of paying dividends every year, they also pay rising dividends every year as well.

JNJ will be more of a traditional dividend payer, whereas BAC and LMT are going to offer more stock appreciation potential as well as solid dividend growth.

Let me know down in the comments section below what you think of these three dividend stocks, and whether you own any of them in your portfolio.

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