The defence sector remains one of the clearest long-term investment themes globally. NATO members are moving towards materially higher defence spending targets, while Europe, the US, and parts of Asia continue to rebuild military capabilities and ammunition inventories. This creates unusually strong revenue visibility through multi-year order backlogs.
Defence expenditures and NATO’s 5% commitment
For income-focused investors, the key is finding companies that combine:
- Sustainable dividends
- Growing order books
- Exposure to defence spending growth
- Reasonable valuations
Talking defence with Bloomberg Intelligence analyst George Ferguson – Podcast
Best global defence growth & income stocks
| Company | Region | Dividend Appeal | Growth Outlook | Valuation View |
| BAE Systems | UK | Strong | High | Reasonable |
| RTX Corporation | US | Strong | High | Fair |
| Lockheed Martin | US | Excellent | Moderate-High | Attractive |
| Leonardo | Italy | Growing | High | Attractive |
| Thales | France | Solid | High | Reasonable |
| Saab | Sweden | Moderate | Very High | Fair |
1. BAE Systems (LON:BA.) £19.745
Why it stands out
BAE remains arguably the best-balanced defence stock available to UK investors.
The company benefits from:
- AUKUS submarine spending
- Eurofighter production
- Naval shipbuilding
- Electronic warfare systems
BAE’s backlog reached roughly £78 billion, providing years of revenue visibility.
Income sustainability
- Progressive dividend policy
- Strong cash generation
- Broad customer diversification across the UK, US, Australia and Saudi Arabia
Valuation
While no longer cheap after several years of strong performance, forward earnings multiples remain reasonable relative to expected earnings growth.
Verdict: Best overall blend of growth, income and valuation.
2. RTX (NYSE:RTX) $177.41
Why it stands out
RTX combines missile defence exposure with commercial aerospace recovery.
Key growth drivers include:
- Patriot missile systems
- Air defence radars
- Aircraft engine demand
- NATO rearmament
RTX recently reported a backlog exceeding $250 billion.
Income sustainability
- Dividend yield around 1-2%
- Strong free cash flow generation
- Long history of shareholder returns
Valuation
Not deeply undervalued, but significantly less demanding than many European defence growth names.
Verdict: High-quality compounder with dependable dividend growth.
3. Lockheed Martin (NYSE:LMT) $525.02
Why it stands out
Lockheed remains the dominant prime contractor in Western defence.
Key programmes include:
- F-35 fighter jet
- Missile defence systems
- Space programmes
- Classified defence projects
The company maintains a backlog approaching $200 billion.
Income sustainability
Among the strongest in the sector:
- Decades of dividend growth
- High free cash flow conversion
- Large share buyback programme
Valuation
At roughly mid-teen earnings multiples, Lockheed trades cheaper than many European defence peers despite comparable backlog strength.
Verdict: Best value income stock in global defence.
4. Leonardo (BIT:LDO) €53.40
Why it stands out
Leonardo has become one of Europe’s most interesting defence stories.
Management is increasingly focusing on:
- AI-enabled defence
- Cybersecurity
- Digital warfare
- Advanced air defence systems
The company expects €142 billion of cumulative orders by 2030.
Income sustainability
Leonardo’s payout ratio remains low, leaving substantial room for future dividend growth.
Valuation
The stock trades at a discount to many European defence peers while still offering strong earnings growth potential.
Verdict: Best dividend growth opportunity in European defence.
5. Thales (EPA:HO) €238
Why it stands out
Thales is less dependent on heavy weapons and more exposed to:
- Defence electronics
- Cybersecurity
- Radar systems
- Secure communications
These areas are becoming increasingly important as NATO spending shifts towards technology and digital defence.
Income sustainability
Among major European defence stocks, Thales offers one of the highest dividend yields while maintaining manageable payout ratios.
Valuation
Thales currently offers one of the best combinations of free-cash-flow yield and earnings quality among European defence companies.
Verdict: Best European defence income stock.
6. Saab (STO:SAAB-B) KR533.20 (~£41.83)
Why it stands out
Saab has emerged as a major beneficiary of European rearmament.
Growth drivers include:
- Gripen fighter exports
- Air defence systems
- Surveillance technology
- Naval defence
Income sustainability
The yield is modest, but dividend growth has been strong.
Valuation
Saab trades at a premium valuation because investors recognise its growth potential. That increases execution risk but also supports strong earnings expansion.
Verdict: Highest-growth defence stock on this list.
Ranking for UK Retail Investors
| Rank | Stock | Income | Growth | Valuation |
| 1 | BAE Systems | ★★★★☆ | ★★★★☆ | ★★★★☆ |
| 2 | Lockheed Martin | ★★★★★ | ★★★☆☆ | ★★★★★ |
| 3 | Leonardo | ★★★☆☆ | ★★★★★ | ★★★★☆ |
| 4 | RTX Corporation | ★★★★☆ | ★★★★☆ | ★★★☆☆ |
| 5 | Thales | ★★★★☆ | ★★★★☆ | ★★★★☆ |
| 6 | Saab | ★★☆☆☆ | ★★★★★ | ★★★☆☆ |
Bottom line
The defence sector remains one of the clearest long-term investment themes globally. If building a long-term global defence portfolio today, a combination of BAE Systems, Lockheed Martin and Leonardo arguably offers the best balance of income sustainability, structural growth and sensible valuation.
BAE provides UK exposure, Lockheed delivers dependable dividend growth at a reasonable price, and Leonardo offers perhaps the most attractive combination of European defence growth and valuation as spending continues to accelerate across NATO countries.
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