Ultimate Guide to Investing in Defense and Military Stocks

If you were to take a close look at news releases today, you would swear that we are on the verge of another major war. Planes are being shot down, our president is bickering with global leaders, and tension can be felt in the air.

Even if you're just beginning to invest in the stock market, the way defense stocks look clearly indicates good things to come. If there was ever a time to start investing in defense and military stocks, now would be it. The military industrial complex is booming on all fronts and military contracts have become pricier than ever.

Investing in this sector isn't like most others. There are many nuances to the game. Here's what you should be aware of if you want to make bank while investing in defense.

The first thing you should understand about investing in defense and military stocks is what they do.

Not all defense stocks are weapons-related. Not all military stocks are weapons-related. Some are aviation-focused. Others may have contracts with the US government for things like building military compounds, structures, and more.

It's important to realize another major aspect of this type of investment: not all defense companies will work exclusively for one country. So, while you may be trying to be patriotic by investing in a company that works with the US, it's important to remember that it could also be working with others.

Military and defense companies, plain and simple, work with the armed forces to create new weapons, improve defense systems, or just make their clients safer in one way or another.

So, why should you be investing in defense and military stocks, anyway?

The primary reason that people choose to start investing in these stocks is profit. On average, the top five largest defense stocks have averaged return rates of around 37 percent per year. Not per 10 years, but annually. That's incredibly rapid growth.

The military industrial complex currently has some of the highest profit margins it's ever had. Part of its massive returns have to deal with those high profit margins.

There are many ways to pick a stock in this industry...

It's very easy to select stocks using fundamental and technical analysis, there's actually a better way to learn how to value stocks that's specific to this sector. Simply put, the price of the stocks almost directly reflects how much they have sold during the past year.

The more popular stocks can trade for around double their sales, since markets are starting to pick up on the annual sales strategy's reliability. Either way, if you want to value stocks in this industry, looking at the sales can help.

Here's what you need to know about stocks as far a the overall prospects go.

Yes, the returns have been staggeringly high, but that doesn't always mean than investing in defense and military stocks is the way to go. The overall industry has a couple of things that make it a moderate bargain, rather than a steal...

• Dividends. The dividend yields of this industry could be better, no lie. It's under the overall average of 2 percent compared to other S&P 500 stocks. If you're looking for low-risk investments with high returns in the form of dividends, look elsewhere.
• Growth. If you're a growth investor, then these stocks might not be your favorite. They're expected to have around a 10 percent growth rate—similar to most S&P 500 index funds.

So, the overall values are great if you're looking for reliable returns, but these aren't a breakout by any means.

There are tons of stocks to choose from, by the way!

If you're new to investing in defense and military stocks, then you have plenty of choices open to you. Here are some of the best stocks in the defense sector:

• Boeing (NYSE: BA) This airplane manufacturer stock remains one of the highest dividend payers in the industry. It's a solid buy.
• Textron (NYSE: TXT) Textron was recently called a "bargain in the rough" for being valued at less than its sales stock. If any company would be capable of growth, it's the multifaceted defense conglomerate known as Textron.
• Northrop Grumman (NYSE: NOC) This aerospace defense stock has seen pretty good growth over recent years and shows no signs of stopping.
• Lockheed Martin (NYSE: LMT) Out of all the stocks on this list, Lockheed Martin is one of the most well known. It also happens to be one of the big five.
• General Dynamics (NYSE: GD) Another one of the top five in the industry, General Dynamics is known for being one of the largest contractors in the United States.

There are plenty more where that came from.

Some may also consider ammunitions companies to be defense and military stocks.

Guns and ammunition are military staples, so it makes sense that they would be included as defense stocks by certain investment groups. This means that companies like Smith and Wesson (NASDAQ:SWHC) would be included.

There's some good news to this. Guns never really go out of style, which means that there's plenty of room for profitable long-term investing in the stock market.

However, they can be greatly influenced by political issues.

One thing that wouldn't affect most other companies as heavily is today's political scene. If we have hawkish presidents or keep our habit of investing greatly in military technology, then you will continue to see growth in these stocks.

On the other hand, if sales suddenly plummet for one reason or another, military stocks will see a serious dip in their value. Even so, that's not very likely considering the global political climate.

We would like to point out that defense stocks are very low risk.

If you're looking for low-risk stocks that will remain relatively steady, defense is it. Countries will always need to buy new gear to protect themselves with. This is why many people will continue to hold onto their stocks past retirement age.

Though they are generally stable, you still may want to avoid overvalued stocks due to the possibility of a correction.

A good thing to remember is that stocks of all types will eventually face a correction that shows their true value. If you want to make sure to avoid buying a temporarily bloated stock, try to avoid investing in defense and military stocks that have a value worth close to twice their sales.

If you choose to ignore that advice, choose military stocks that also have a civilian side to them—such as Boeing or Honeywell.

Now is a good time to invest, really.

With the current political climate and the historical returns that military and defense stocks have held, it's easy to see why investing in defense and military stocks is a wise choice.

If you've been considering it and aren't sure where to start, try an ETF that's professionally managed and focused on the military complex. It's a good start!