Top 2 Passive Income Stocks with Payout Ratio Under 50%

Dividend-paying stocks have long been a staple of many passive income strategies. However, some dividend stocks are clearly better candidates for a passive income portfolio.

For example, research shows that companies with payout ratios below 75% are less likely to cut or suspend their dividends, making them more reliable sources of income. Stocks with even lower payout ratios—below 50%—may offer an extra layer of safety and room for future dividend growth.

Two companies from the aerospace and defense industry stand out in this context. Northrop Grumman (NIGHT 0.55%) AND Howmet Aerospace (HWM 0.02%) both have conservative payout ratios, with Howmet well below 50% and Northrop hovering near that critical threshold. This financial prudence suggests a solid foundation for current dividend payments and the potential for significant increases in the coming years.

Here’s why investors interested in passive income may want to consider buying and holding these two dividend stocks.

Northrop Grumman: The Power of Passive Income

Northrop Grumman, founded in 1939, is one of the world’s largest defense contractors and a notable passive income generator. The company’s diverse portfolio includes aerospace, defense, mission and space systems. With annual revenues on track to exceed $40 billion this year, Northrop Grumman continues to demonstrate strong growth in the aerospace and defense industry.

Northrop Grumman stock has solid passive income potential. It currently offers a yield of 1.58%, with a five-year annual dividend growth rate of 7.27%. The company also maintains a conservative payout ratio of 49.8%, suggesting the potential for future passive income growth via dividend growth.

The company’s long-term growth potential is based on its commitment to key military development programs, such as the Ground Based Strategic Deterrent program and the ongoing development of the state-of-the-art B-21 bomber.

Northrop Grumman’s revenues are largely based on government defense spending, which introduces an element of political risk. However, this risk is mitigated by the historical trend of rising global defense budgets.

The company has consistently benefited from this trend, achieving above-market profits over time. With global defense spending continuing to rise, Northrop Grumman appears well-positioned to maintain its strong performance.

NOC total return data by YCharts.

The combination of a growing dividend, commitment to long-term defense projects, and exposure to emerging aerospace technologies makes Northrop Grumman an attractive option for those seeking passive income. The company offers investors the potential for both steady passive income and long-term growth.

Howmet Aerospace: Renewed Focus on Dividend Growth

Howmet Aerospace is a leading provider of advanced engineering solutions for the aerospace and transportation industries. The company operates in four segments: engine products, fastening systems, engineered structures and forged wheels.

Howmet Aerospace’s recent 60% dividend hike, combined with its established market position, makes it an intriguing passive income play. The company currently offers a modest 0.33% yield on a very conservative 8.44% payout ratio, suggesting ample room for future increases in its quarterly cash distribution.

Howmet Aerospace’s business model is based on demand for engines and attachment systems from aircraft manufacturers, which are responding to the growth in demand for air travel. This strong market position has allowed the company to raise its full-year guidance and increase its quarterly dividend in recent years.

It’s worth noting that Howmet Aerospace has cut its dividend in the recent past, suspending it to preserve cash during the pandemic. However, the company’s recent dividend hike and improved outlook signal a potential return to solid dividend growth.

The Two Best Candidates for Passive Income

Northrop Grumman and Howmet Aerospace are being sifted as attractive candidates for a passive income portfolio. These two defensive stocks offer an intriguing mix of current yield, dividend growth potential, and sustainability—three key characteristics shared by the best passive income stocks.

George Budwell owns shares in Howmet Aerospace and Northrop Grumman. The Motley Fool has no stake in any of the stocks mentioned. The Motley Fool has a disclosure policy.