Finding dividend-paying stocks with attractive growth prospects can be a challenging task. Companies need to have sufficient free cash flow (FCF) to support business opportunities and pay dividends. When you find these companies, it’s essential to periodically examine them to determine what you should do with the stocks. While you can conduct this review throughout the year, January is a convenient time to do so.
In this article, we’ll discuss two dividend-paying stocks that have attractive growth prospects: Walmart (NYSE: WMT) and Home Depot (NYSE: HD). Both companies have long histories of raising payouts and should continue providing capital appreciation opportunities.
1. Walmart
A Household Name with a Strong Track Record
Walmart has become a household name due to its widespread namesake stores and Sam’s Club stores, serving over 255 million customers every week. Its focus on keeping costs very low to keep prices down has clearly attracted shoppers.
Although the company’s core philosophy hasn’t changed, management has been investing in technology to create a better experience for customers, such as ordering online and picking up in-store, including same-day delivery in many locations. People continue to see Walmart as a place to shop and spend money.
Strong Performance and Prospects
The core Walmart U.S. segment had a same-store sales (comps) increase of 5.3% in the fiscal third quarter, which ended on October 31, 2024. More than half of the increase was attributable to e-commerce. The quarter’s adjusted operating income for the entire company grew 6.2% when excluding foreign currency translation effects.
Management expects at least an 8.5% increase in profitability for the entire year. Walmart initially declared a dividend in 1974 and has raised it annually, making the company a Dividend King. Its FCF of $6.2 billion during the first nine months of the year comfortably covered the $5 billion in dividends.
A Valuation Worthy of its Performance
The company’s strong business hasn’t gone unnoticed by investors, with the stock gaining over 71% over the past year through January 2, handily beating the S&P 500’s 23%. Walmart shares trade at a price-to-earnings (P/E) ratio of 37, versus 30 for the S&P 500. However, given the company’s performance and prospects, it seems reasonable that the stock has a higher valuation.
2. Home Depot
A Strong Brand with Fluctuating Results
Home Depot was founded in the late 1970s and has grown to become the largest home improvement retailer by revenue, with over $150 billion in annual sales. Its results fluctuate with the economy, as people buy homes and undertake major construction projects when they feel good about their personal financial situation.
Recent Challenges and Positive Developments
Recently, Home Depot’s results have been weighed down by larger economic forces, such as elevated interest rates, that made it more expensive to buy a home and finance projects. Additionally, higher prices for basic items like food and housing made homeowners more reluctant to fund construction. Comps have been dropping, including by 1.3% in its fiscal third quarter, which ended on October 27, 2024.
Management expects comps to fall 2.5% for the year. However, there have been positive developments that should help boost Home Depot’s sales. Existing home sales have reversed declines, increasing 4.8% in November. The Federal Reserve has been cutting short-term rates, affecting rates on home equity loans and lines of credit that are popular to finance construction.
A Dividend with a Safe Payout Ratio
Home Depot has increased dividends every year since 2010. While earnings have been dropping lately, its 60% payout ratio indicates that the payment remains safe. The shares gained 12.7% over the last year but have badly lagged the S&P 500. However, when economic conditions improve, Home Depot remains in a strong position to benefit, which should propel sales and earnings increases.
Home Depot’s shares trade at a P/E of 26, a discount to the S&P 500.
Should You Invest $1,000 in Home Depot Right Now?
Before you buy stock in Home Depot, consider the following:
- The company has a strong brand and a long history of raising dividends.
- Its results fluctuate with the economy, but it remains in a strong position to benefit from improving economic conditions.
- The shares trade at a discount to the S&P 500, making them an attractive option for investors.
However, it’s essential to conduct thorough research and consider your individual financial situation before making any investment decisions.
