One sector that has stayed out of the spotlight over the past year and a half has been aerospace and defense. While the COVID-19 pandemic weighed heavily on aerospace, the defense side was somewhat ignored as fund managers rotated to cyclical stocks and value plays. The reality is that, in an expensive stock market like we find ourselves in now, the sector may be one of the best ideas, not only for the fourth quarter but for 2022 as well.

With conditions improving dramatically as we head toward the end 2021, the top stocks in the sector look cheap. Given their solid dividends, they offer investors very good total return potential.

We screened the BofA Securities aerospace and defense research universe looking for stocks rated Buy that are paying the highest dividends. These four that look like outstanding ideas now that can be bought in front of third-quarter earnings. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

General Dynamics

Like other major defense prime contractors, this submarine and tank builder looks poised to deliver solid numbers and guidance. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.

Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker eight-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.

Top analysts expect the company to modestly beat earnings expectations and raise guidance. They also expect solid numbers from the Gulfstream division.

Investors receive a 2.30% dividend. BofA Securities team has a $240 price target on General Dynamics stock, and the consensus target is $221.71. The shares closed on Monday at $206.66.

Lockheed Martin

This is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services. It also has one of America’s highest-paid CEOs.

Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from many foreign allies of the nation.

Many analysts expect the company to top earnings expectations and increase 2021 guidance, to go along with very solid cash flow numbers for 2021 to 2023.

Investors receive a 3.07% dividend. The $440 BofA price objective is higher than the $421.22 consensus target for Lockheed Martin stock. The shares closed at $365 on Monday.

After its 2019 merger, this is now the sixth-largest defense company. L3 Harris Technologies Inc. (NYSE: LHX) is an agile global aerospace and defense technology innovator engaged in the provision of defense and commercial technologies across air, land, sea, space and cyber domains.

Its Integrated Mission Systems segment includes intelligence, surveillance and reconnaissance; advanced electro optical and infrared; and maritime power and navigation. The Space and Airborne Systems segment comprises space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare.

Top Wall Street analysts have felt for some time that the company is situated well in the high growth buckets of the Defense Department budget, and many believe the business is not as short-cycle as the market historically has perceived. Merger synergies give the business a unique path to cash flow and margin upside, along with above-average revenue growth.

Shareholders receive a 1.71% dividend. The BofA Securities price target is $292, which would be an all-time high. L3 Harris Technologies stock closed on Monday at $238.78.

Northrop Grumman

This was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide. It also has one of America’s highest-paid CEOs.

The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.

The Information Systems segment offers advanced solutions for the Department of Defense, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.

The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.

Northrop Grumman stock comes with a 1.60% dividend. The BofA Securities price target is $460. The consensus target is $409.83, and shares closed on Monday at $393.89.

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These top companies will be reporting earnings near the end of the month or in early November, giving investors a chance to buy in front of what many across Wall Street feel could be an outstanding quarter. In this overbought and expensive market, all four still offer compelling value.

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