The stock market will occasionally experience bouts of volatility, but holding quality dividend stocks that regularly deposit extra cash into your account can smooth over those rough patches.
Right now is a great time to get started with dividend investing, since there are several businesses that you already know that are paying yields that significantly exceed the S&P 500(SNPINDEX: ^GSPC) average of about 1.27%.
Here's why these three Motley Fool contributors believe Home Depot(NYSE: HD), Target(NYSE: TGT), and Coca-Cola(NYSE: KO) can pay passive income for a lifetime.
A resilient income stock
John Ballard (Home Depot): Shares of Home Depot have surged close to new highs this year despite weak comparable-store sales (comps). Higher interest rates have pressured demand for home projects, but this blue chip stock has paid a consistent dividend for years and has tremendous opportunities for growth.
Home Depot has handled the weak sales environment well. Despite a 3% year-over-year decrease in comps last quarter, adjusted earnings were only slightly down. CEO Ted Decker said, "The underlying long-term fundamentals supporting home improvement demand are strong."
The leading home improvement retailer operates in an economy with a total net worth of households and nonprofit organizations valued at $164 trillion as of the second quarter, according to the Federal Reserve. The company estimates this opens up a $1 trillion market for home improvement projects, which is a large opportunity relative to Home Depot's trailing revenue of $152 billion.
Wall Street understands this favorable long-term backdrop, which is why the stock is performing well even though the company is experiencing a soft year for sales. This makes Home Depot's above-average dividend yield all the more attractive.
The company has paid a quarterly dividend for more than 37 years. Its current quarterly payment is $2.25 per share. It usually increases the dividend every year in February, when it most recently raised the payout by 7%, bringing the forward yield to 2.16%.
Home Depot benefits from favorable long-term trends in household net worth that should pay investors passive income for the rest of their life.
An overlooked dividend king
Jeremy Bowman (Target): Target hasn't gotten a lot of love on Wall Street lately, and that's understandable. It has underperformed its multicategory peers Walmart and Costco Wholesale, and has struggled with inventory issues and theft. However, Target finally looks set to turn things around.
The company delivered strong margin expansion in its most recent earnings report, and falling interest rates should encourage consumer spending at its stores. Compared to Walmart and Costco, Target makes more of its revenue from discretionary goods like apparel, electronics, toys, and home goods, which means it's more sensitive to consumer spending.
Inflation took a bite out of its earnings in 2022 and 2023, but wages have been growing faster than prices for over a year now. The scales should eventually tip back in Target's favor, possibly as soon as this holiday season, as the National Retail Federation is now projecting holiday sales will approach $1 trillion this year, up anywhere from 2.5% to 3.5% from a year ago.
That trend, cooler inflation, and falling interest rates should all help Target deliver steady growth in the holiday season and into 2025.
As a dividend payer, the company has a track record in the retail industry that is nearly peerless. It's a Dividend King, having raised its payout for 53 years straight, and it now offers a yield of 3% at an affordable price-to-earnings ratio of 15.4.
While Target's recent dividend hikes have been underwhelming, it won't take much to get them to accelerate from here. Investors can get the benefit of a 3% yield and take advantage of the discount price and the coming tailwinds by buying the stock today.
The classic dividend king
Jennifer Saibil (Coca-Cola): Coca-Cola is the classic Dividend King, rock solid for dividend payments and growth. The company has raised its payout for the past 62 years consecutively, through thick and through thin, and the yield is typically around 3% -- more than double the S&P 500 average.
The stock hasn't been a reliable market beater over the years, even once you add in the dividend. Still, its steady, growing, and high-yielding dividend has made it an attractive option for passive-income investors, and it's as secure a stock as any for portfolio protection.
But things are changing, and Coca-Cola is on a roll. The company restructured early in the pandemic under the direction of CEO James Quincey, who was relatively new at the time. It's leaner and more efficient, and it's focusing on its core legacy brands as well as newer, global names. It has performed superbly over the past few years, rebounding from pandemic lows and reporting robust growth and profitability.
Coca-Cola has enjoyed sales increases and expanding margins despite inflation, counting on its global distribution system and beverage innovation to meet changing consumer needs. In the second quarter, sales were up 3% year over year, but organic revenue rose 15%. Operating margin was 21.3%, up from 20.1% last year.
This bodes well. As inflation looks like it's starting to ease, more people will go back to buying their favorite brand-name beverages. Coca-Cola still sees varied growth opportunities, between organic industry growth, grabbing market share in developing regions, and beverage innovation. The company carefully acquires new brands that it can seamlessly add to its distribution system for higher revenue with better cost efficiency, a model for long-term growth.
Coke stock is up nearly 20% this year, and conversely, the dividend yield is on the lower side at 2.7%. That should remain around its average and reward investors for the foreseeable future, and they can benefit from share-price gains as Coca-Cola drives growth and innovation.
Should you invest $1,000 in Home Depot right now?
Before you buy stock in Home Depot, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Home Depot wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $839,122!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of October 14, 2024
Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Target. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, Target, and Walmart. The Motley Fool has a disclosure policy.
