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The attack last week on South Korea shone the spotlight on geopolitical risk. Indeed, one might wonder if the world is entering an era of increased military conflict now that political leaders in the world’s hot spots may be emboldened by the straitened financial circumstances of the U.S.A.

“In terms of the marketplace … an investment in defence contractors may be a hedge against geopolitical risk,” suggests Sacha Peter over at the Divestor blog. The U.S. defense companies he lists are: Lockheed Martin (LMT), Raytheon (RTN), Boeing (BA), General Dynamics (GD), and Northrop Grumman (NOC).

Valuations are fairly low. Defense contractors derive a great deal of their revenue from the government but with massive fiscal deficits and debts, the expectation is that there could be cutbacks in U.S. military spending. But that is an expectation that could evaporate if geopolitical tensions heat up. When it comes to guns or butter, guns tend to win out.

And a dividend yield of 4.4%

I’ve been watching Lockheed Martin for a few months now. Since May, the stock price has declined steadily from $85 to under $70. The dividend now yields 4.4%.

This yield is way above the market average yet it appears to be one of the strongest. For starters, it is financed by a mere third or so of free cash flow. In addition, the dividend has been increased every year since 2002. Finally, Lockheed Martin is returning cash to shareholders through a share-repurchase program: during fiscal 2009, the number of outstanding shares was reduced, from 400 million to 382 million.

Disclosure: None

Source: Lockheed Martin: A Hedge Against Geopolitical Risk With a 4.4% Dividend