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Battle of Dividends: Texas Instruments vs. Home Depot

By Daniel Sparks - Sep 17, 2018 at 7:46PM

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Both companies are renowned for their heady and fast-growing dividends. But which income investment is better?

With so many stocks trading at pricey valuations, are you looking for solid dividend stocks to round out your portfolio? Two all-star dividend stocks are semiconductor company Texas Instruments ( TXN -0.10% ) and home improvement retailer Home Depot ( HD 0.01% ). Both stocks benefit from meaningful dividend yields and exceptionally strong dividend growth.

But which company is the better dividend stock? Find out in this head-to-head comparison.

Company

Dividend Yield

Payout Ratio

5-Year Average Annual Dividend Growth Rate

Texas Instruments

2.4%

54%

24%

Home Depot

2%

45%

25%

Data source: Yahoo! Finance, Morningstar, and Reuters. 

Texas Instruments

Semiconductor company Texas Instruments has long been known for its dividend-friendly capital return policies. The company has paid dividends to investors every year since 1962 and it has increased its dividend for 14 years straight, with its last dividend increase coming in at an impressive 24%.

The company's dividend remains attractive today. Not only does Texas Instruments have a meaty dividend yield of 2.4%, but there's also good reason for the dividend to keep growing nicely in the coming years.

A sketch of a bar chart showing a growth trend

Image source: Getty Images.

The most straightforward reason to expect more robust dividend growth from Texas Instruments is the company's low payout ratio, or the percentage of earnings the company is paying out in dividends. Texas Instruments has a payout ratio of 54%, leaving plenty of upside for dividend growth in the coming years.

But another case can be made for Texas Instruments' dividend growth potential by looking at the company's free cash flow trend. Texas Instruments' trailing-12-month free cash flow has soared 42% year over year. Thanks to this enormous jump in free cash flow, Texas Instruments' recent dividend payments only account for 41% of trailing-12-month free cash flow.

Home Depot

Texas Instruments definitely has Home Depot beat when it comes to dividend yield; Home Depot's dividend yield is 2%. Of course, this dividend yield is still notably above the average dividend yield of stocks in the S&P 500 of 1.8%. 

But Home Depot looks solid when it comes to dividend growth potential. First of all, Home Depot has a lower payout ratio of 45%. In addition, Home Depot's dividend has increased at an impressive rate of 25% annually over the past five years.

Further, analysts expect Home Depot's earnings per share to grow at a slightly faster rate than Texas Instruments' over the next five years -- a trend that will help support Home Depot's dividend growth during this period. On average, analysts expect Home Depot's EPS to rise 14.9% annually. For Texas Instruments, analysts are modeling for EPS to rise 14.4% annually. 

Considering both its lower payout ratio and analysts' higher expectations for earnings-per-share growth, Home Depot looks positioned to grow its dividend at a faster rate than Texas Instruments over the long haul.

The verdict

While Home Depot could see more robust dividend growth over the next five years, Texas Instruments' dividend yield is far enough ahead of Home Depot to make the semiconductor company look slightly more attractive as a dividend investment than the home improvement retailer.

But that doesn't mean investors should avoid Home Depot and instead only buy Texas Instruments. Both dividend stocks are good long-term bets; Texas Instruments just appears a bit more attractive.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$193.38 (-0.10%) $0.20
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$407.81 (0.01%) $0.04

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