2 Top Passive Income Stocks With Payouts Below 50%

Dividend-paying stocks have long been the cornerstone of many passive income strategies. However, some dividend stocks are definitely superior 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 safer sources of income. Stocks with even lower payout ratios — under 50% — can provide an extra layer of security and room for future dividend growth.

Two aerospace and defense stocks stand out in this regard. Northrop Grumman (NIGHT 0.55%) and Howmet Aerospace (HWM 0.02%) both have conservative payout ratios, with Howmet well below the 50% threshold and Northrop approaching that critical threshold. This financial prudence suggests a solid foundation for continued dividend payments and the potential for substantial increases in the years ahead.

Image source: Getty Images.

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

Northrop Grumman: A passive income powerhouse

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 spans aircraft, defense, mission and space systems. With annual revenue on track to reach $40 billion this year, Northrop Grumman continues to demonstrate strong growth in the aerospace and defense industry.

Northrop Grumman stock stands out for its solid passive income potential. It currently yields 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 room for future increases in passive income through dividend growth.

The company’s long-term growth potential is supported by its involvement in key military development programs, such as the Ground Based Strategic Deterrent program and the continued development of the B-21 cutting-edge bomber.

Northrop Grumman’s revenue relies heavily on government defense spending, which introduces an element of political risk. However, this risk is mitigated by the historical upward trend in global defense budgets.

The company has consistently capitalized on this trend, delivering market returns over time. As global defense spending continues to rise, Northrop Grumman appears well-positioned to maintain its strong performance.

NOC Total Return Tier Data by YCharts.

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

Howmet Aerospace: A renewed focus on dividend growth

Howmet Aerospace is a leading provider of advanced engineering solutions for the aerospace and transportation industries. The company operates through four segments: Engine Products, Fasteners, Engineered Structures and Forged Wheels.

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

Howmet Aerospace’s business model is driven by demand for its engine and attachment systems products from aircraft manufacturers responding to increased 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 cut its dividend in the not-so-distant past, suspending it to conserve cash during the pandemic. However, the company’s recent dividend hike and improved outlook signal a potential return to robust dividend growth.

Two top passive income candidates

Northrop Grumman and Howmet Aerospace display attractive candidates for a passive income portfolio. These two defensive stocks offer an intriguing mix of current yield, dividend growth potential and durability — three key traits shared by the best passive income stocks.