Home Depot (NYSE:HD) has offered massive returns to investors over the years. It started as a home improvement retailer in metro Atlanta, and long-term investors benefited as the company expanded across the U.S. and beyond.

However, when looking at this company, investors may overlook the outsized benefits offered by the dividend. This too has seen impressive gains over the decades. It began at a split-adjusted quarterly payout of just $0.000439 per share in 1987. Home Depot's current quarterly dividend of $1.50 per share is about 3,417 times higher than its original payout.

Given that level of growth, most investors would probably agree that the dividend has substantially benefited long-term investors. Still, whether present-day investors should view the dividend as "great" depends on its continued sustainability and how it compares to peers.

The Home Depot dividend described

In 2020, Home Depot is on track to pay dividends totaling $6.00 per share. With the stock trading in the $255 per share range, this amounts to a yield of approximately 2.4%. Considering that the average yield for the S&P 500 comes in at around 1.9%, Home Depot offers its investors an above-average cash return. Moreover, Home Depot has increased its payout every year since 2010. 

An aisle within the lumber section of a home improvement store.

Image source: Getty Images.

Sustainability

Home Depot's dividend payout ratio, or the percentage of current-year net income claimed by the dividend, comes in at about 60.4%. Although this remains a significant burden, it still leaves 39.6% of the company's profit available for payout hikes, stock buybacks, or growth investments.

The dividend appears more sustainable from a cash perspective. Over the past four quarters, the company generated free cash flow of $12.2 billion. The yearly dividend expense of $6.07 billion left Home Depot with ample excess cash flow after covering the payout. 

Currently, the company also holds $8.7 billion in cash. Additionally, analysts forecast that earnings per share will grow by an average of 4.2% per year for the next five years. Although most would consider this a modest growth rate, it does not damage the sustainability of the dividend.

How Home Depot's dividend compares

Home Depot's dividend stacks up well against its main rival in the home improvement sector, Lowe's, and against other retailers in general. Lowe's annual dividend of $2.20 per share amounts to a yield of just under 1.7%. Costco, Walmart, and Target also pay lower yields than Home Depot.

Unlike Lowe's, Home Depot does not hold Dividend Aristocrat status. However, Home Depot remains financially stable, meaning the company will probably continue to increase or at least maintain its current dividend.

Admittedly, investors can find much higher dividend yields, particularly outside of retail. However, these companies come with some level of risk. For example, Altria offers a yield of about 8%, while investors can earn an approximate 6.9% yield with ExxonMobil. Still, both of these companies carry considerably higher liability and financial risks. Although many investors will take on more risk for the higher yield, Home Depot stock appears more suitable for the risk averse. 

How "great" is Home Depot's dividend?

"Greatness" is subjective, but Home Depot looks like an excellent choice for risk-averse investors looking for stable dividend income. The yield not only comes in higher than that of its most direct competitor, but it also comes in ahead of other major retailers. 

Investors should also remember that Home Depot is a stable business that registered sales growth even at the height of the COVID-19 pandemic. Despite coronavirus-related shutdowns, sales increased by 7.1% in the most recent quarter.

At a forward price-to-earnings (P/E) ratio of approximately 25.6, Home Depot is not a cheap stock. Its projected annual earnings growth also significantly lags the more than 19.2% annual increases seen in the previous five-year period.

However, slowing growth affects neither the sustainability of the payout nor the company's ability to maintain the dividend. If you're looking for a safe, stable source of above-average yield in the retail sector, Home Depot stacks up well against other stocks.