Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. Therefore, finding a solid dividend takes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to take a look at one dividend-paying company that you can put in your portfolio for the long term without much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock.
This week we're going to take a look at home improvement giant Home Depot (NYSE: HD ) .
I can just hear the moaning on the other end of the computer already: "But Home Depot is hovering around a 52-week high!" I fully understand those concerns and the fact that Home Depot definitely isn't as cheap as it was when the housing bubble burst in 2008, but you'd be foolish to assume that Home Depot's better days are behind it.
Home Depot and its rival Lowe's (NYSE: LOW ) are actually in a very rare and sweet position within the building sector -- they'll profit whether consumers are buying new homes or renovating their current homes. When the economy was robust, Home Depot and Lowe's made a killing from independent contractors and purchases from larger homebuilders. Now that the housing sector is struggling to move a backlog of nearly 1.4 million foreclosed homes, homeowners are instead choosing to stay in their homes and remodel them instead -- another specialty of the two companies. Either situation produces a win-win for Home Depot.
For Home Depot, it isn't just enough to remain in this sweet spot; it's about continuing to grow its market share. Based on its third-quarter results released in November, it was able to take market share from rival Lowe's and upped its earnings forecast for the third time in six months. Better utilization of technology in its stores and of its staff coupled with more effective price cuts drove growth faster at Home Depot than Lowe's.
This growth didn't just add market share to Home Depot's already dominant position -- it also allowed the company to boost its dividend by a clean 16% to $0.29 quarterly. Although Home Depot doesn't raise its dividend with any regularity, it has still grown its dividend annually by 19.2% over the past decade. Check out how rapidly Home Depot's annual payout has grown despite the worst housing downturn in 70 years:
Source: Dividata. *Implied 2012 dividend.
Home Depot's rivals also signal that strength in remodels is expected to continue. Lumber Liquidators (NYSE: LL ) , which supplies discount hardwood flooring and isn't exactly on many optimists' wish lists right now, did report a 17% jump in revenue and a 57% spike in net income in its third-quarter results released in October. Similarly, Trex (Nasdaq: TREX ) , an outdoor patio outfitter, reported a 12% jump in its third-quarter sales and significantly reduced its losses to $0.03 per share from $0.58 in the year-ago period.
Another reason to like Home Depot is that it no longer has to worry about Sears Holdings (Nasdaq: SHLD ) , which is currently closing up to 120 of its Kmart and Sears locations in order to conserve cash. With Sears focused on returning to profitability, Home Depot can swoop in for the kill and continue to steal market share from the iconic retail chain.
Think about Home Depot this way: If the company has been able to raise its earnings forecast three times in six months and grow its dividend by an average of 19.2% over the past decade, imagine how strong it will be when housing prices actually do begin to recover. Stew on that for a while and consider adding Amercia's home-improvement superstore to your watchlist.
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "11 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!