Three Dividend-paying Defense Funds to Consider

Three dividend-paying defense funds to consider offer investors ways to gain exposure to a key sector that increasingly is needing to ramp up production and speed up innovation to keep up with rising demand for military equipment with wars in Ukraine, the Middle East and elsewhere.

A “sense of urgency” to ready U.S. forces is not communicated well enough from senior officials who need to advocate for funding and innovation, BoA Global Research’s lead defense and aerospace analyst Ron Epstein wrote in a Jan. 5 research note. The 16th annual BofA Defense Outlook Forum, held Jan. 3, attracted industry experts, corporate leaders, U.S. Department of Defense (DoD) personnel and the investment community to assess priorities and the greatest needs to prepare for modern warfare and national defense.

“Several experts noted that geopolitical risk stemming from the interconnectedness of potential threats — including China, Russia and Iran — is not well understood by the American people,” Epstein wrote. “There also seems to be a disconnect between the forces we need to counter our adversaries and the budget the DoD has to do so. Additionally, experts noted that the DoD has focused on a ‘one war’ strategy, which lacks the capacity and capability to handle a ‘two war’ scenario.”

Three Dividend-paying Defense Funds to Consider: PPA

The first of the three dividend-paying defense funds recommended by former pension fund chairman Bob Carlson is Invesco Aerospace & Defense ETF (PPA), which tracks the SPADE Defense Index. It has the same underweighting and overweighting as SPDR S&P Aerospace and Defense ETF (XAR), said Carlson, who heads the Retirement Watch investment newsletter.

Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.

PPA recently held 52 securities and 53.2% of the fund was in its 10 largest positions. With so many holdings, the fund offers reduced risk compared to buying individual stocks. The biggest positions in the fund recently were Boeing (NYSE: BA), RTX Corp. (NYSE: RTX), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Electric (NYSE:GE).

The fund is up 15.53% for the past year, 15.67% in the last three months and 2.00% during the past month. PPA’s dividend yield recently touched 0.7%.

PPA has the best “risk-reward profile,” compared to similar defense funds, said Michelle Connell, president and owner of Dallas-based Portia Capital Management, LLC.

Michelle Connell heads Portia Capital Management LLC.

One of the reasons that PPA outperforms its peers consistently is that it holds “reasonable weights” of each individual stock, Connell said. PPA’s weightings range from 2% to 6%, she added.

Chart courtesy of www.stockcharts.com

Three Dividend-paying Defense Funds to Consider: XAR

A second fund that provides dividends from defense and aerospace investments is XAR. That exchange-traded fund tracks the S&P Aerospace & Defense Select Industry Index. The fund is overweight in industrials and underweight in technology and consumer cyclicals, Carlson said.

Chart Courtesy of www.stockrover.com; Click this link to learn about www.stockrover.com.

XAR has 34 securities, and 44.2% of the fund is in the 10 largest positions. The fund is up 18.67% in the last year, 19.72% in the past three months and 1.72% for the last month. Its dividend yield currently measures 1.1%.

The largest positions in the fund recently were Axon Enterprise (NASDAQ: AXON), Boeing (NYSE: BA), L3Harris Technologies (NYSE: LHX), Spirit Aerosystems (NYSE: SPR) and Virgin Galactic (NYSE: SPCE).

Chart courtesy of www.stockcharts.com

Three Dividend-paying Defense Funds to Consider: ITA

A third fund that Carlson suggested is iShares US Aerospace & Defense (ITA). The fund has the lowest fees among the three, but has the worst performance compared to the other two, Carlson observed.

ITA seeks to track the Dow Jones U.S. Select Aerospace and Defense Index. Like the other two funds, this one is overweight toward industrials, while underweight toward technology and consumer cyclicals, Carlson said.

The fund recently owned 35 securities, and 76.8% of the ETF was in its 10 largest positions. The top five positions in the fund were Boeing, RTX, Lockheed Martin, Axon Enterprise (NASDAQ: AXON) and L3Harris Technologies (NYSE: LHX).

ITA is up 11.75% during the last 12 months, 20.47% for the last three months and 2.55% in the last month. Its dividend yield is 1.4%.

Connell criticized the concentration of ITA’s holdings in its largest positions. Boeing accounts for 19.26% of the fund, followed by RTX Corp., with 17.09%. RTX fell 13% in the past year to hold back the fund’s performance compared to its peers. Connell counseled.

Chart courtesy of www.stockcharts.com

Military Demand Soars Amid Wars

The U.S. military faces an acute need to adopt innovation, to expedite implementation of technological gains, to tap into the talents of people in various industries and to step-up collaboration with private industry and international partners to enhance effectiveness, U.S. Joint Chiefs of Staff Gen. Charles Q. Brown Jr. told attendees on Nov 16 at a national security conference. Prime examples of the need are multiple raging wars, including those in Ukraine and the Middle East, as well as a cold one involving China and its strained relationships with Taiwan and other Asian nations.

The shocking Oct. 7 attack by Hamas on Israel triggered an ongoing war in the Middle East, coupled with Russia’s February 2022 invasion and continuing assault of neighboring Ukraine. Those brutal military conflicts show the fragility of peace when determined aggressors are willing to use any means to achieve their goals. To fend off such attacks, rapid and effective response is required.

“The Department of Defense is doing more than ever before to deter, defend, and, if necessary, defeat aggression,” Gen. Brown said at the national security conference held at Johns Hopkins University.

Russia’s 360-foot-long Novocherkassk war ship was damaged on Dec. 26 by a Ukrainian attack on a Black Sea port in Crimea. This video shows the ship exploding at the port when struck by aircraft-guided missiles.

Chairman Joint Chiefs of Staff Gen. Charles Q. Brown, Jr.
Photo By: Benjamin Applebaum

National security threats can require immediate action, Gen. Brown said he quickly learned since taking his post on Oct. 1.

 

“We may not have much warning when the next fight begins,” Gen. Brown said. “We need to be ready.”

 

In a pre-recorded speech, Michael R. Bloomberg, founder of Bloomberg LP, told the John Hopkins attendees of a critical need for collaboration between government and industry.

 

“Building enduring technological advances for the U.S. military will help our service members and allies defend freedom across the globe,” Bloomberg remarked before the National Security Innovation Forum at the Johns Hopkins University Bloomberg Center.

Michael Bloomberg, philanthropist and founder of Bloomberg L.P.

The “horrific terrorist attacks” against Israel and civilians living there on Oct. 7 underscore the importance of that mission, Bloomberg added.

The three dividend-paying defense funds to consider provide investors with a path to profit and to be rewarded for their patience with income payouts from each.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Attention Holiday Gift Buyers! Consider purchasing Paul’s inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases or autographed copies! Follow Paul on Twitter @PaulDykewicz. He is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper, after writing for the Baltimore Business Journal and Crain Communications.