It's challenging to find dividend-paying stocks with attractive growth prospects. That's because a company should have enough free cash flow (FCF) to support business opportunities and pay dividends.
When you find these companies, it's a good idea to periodically examine them to determine what you should do with the stocks. While you can do this throughout the year, January is a convenient time to do it.
Walmart (WMT 0.87%) and Home Depot (HD 0.18%) have long histories of raising payouts and should continue providing capital appreciation opportunities. That makes them ideal candidates for current investors to buy more shares.
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1. Walmart
Walmart has become a household name with its widespread namesake stores and Sam's Club stores. It currently serves 255 million customers every week. Its focus on keeping costs very low to keep prices down has clearly attracted shoppers.
While this 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 the stores, including same-day delivery in many locations.
People continue to see Walmart as a place to shop and spend money. The core Walmart U.S. segment had a same-store sales (comps) increase of 5.3% in the fiscal third quarter. More than half of the increase was attributable to e-commerce. This covered the period ended on Oct. 31, 2024.
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. That makes 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.
The company's strong business hasn't gone unnoticed by investors, of course. The stock gained over 71% over the past year through Jan. 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
Founded in the late 1970s, Home Depot has grown to become the largest home improvement retailer by revenue. The company has more than $150 billion in annual sales.
Its results fluctuate with the economy. That's because people buy homes and undertake major construction projects when they feel good about their personal financial situation.
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 Oct. 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.
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 they 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.
