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2 Top-Notch Dividend Stocks With Fast-Growing Payouts to Buy

By Daniel Sparks – Sep 18, 2020 at 7:11AM

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Double-digit dividend growth rates are the norm for these two high-quality stocks.

Many investors are looking for something less volatile than the popular tech stocks that have been swinging wildly recently. Some investors may be searching for ways to balance out their portfolio with income that is likely to persist even in a down market.

Two stocks that fit the bill for investors looking for meaningful dividends without sacrificing too much long-term growth potential are grocer Kroger (KR -3.15%) and home improvement retailer Home Depot (HD -2.41%). Not only do these stocks trade at reasonable valuations today, but their dividends are growing sharply.

Here's why investors should consider adding these two dividend stocks to their portfolio.

A bar chart with an arrow highlighting a growth trend.

Image source: Getty Images.

Kroger

When stay-at-home orders and travel restrictions peaked in April, many grocery stores were deemed essential businesses, and customers flocked to the stores to stock up on important items. Unsurprisingly, Kroger's sales have been growing rapidly recently. In the company's first and second quarters of fiscal 2020, same-store sales excluding fuel rose 19% and 14.6%, respectively.

But even in times of normalcy, Kroger was notably doing well. In fiscal 2019, Kroger's adjusted same-store sales grew 2%, an acceleration from 1.8% in fiscal 2018. Further, even before the pandemic, Kroger had guided for adjusted same-store sales to accelerate to a growth rate of 2.25% in fiscal 2020. Kroger is, of course, on pace to crush this guidance.

Meanwhile, Kroger trades at an incredibly conservative valuation of 13 times earnings. Its recently announced quarterly dividend gives the company a dividend yield of 2.2%, and this dividend is growing rapidly. Kroger increased its dividend by 12.5% this year and 14.2% last year. Indeed, the dividend has more than doubled over the last seven years.

Home Depot

Another top-notch dividend stock worth considering is Home Depot. Though investors will have to pay a pricier valuation of 25 times earnings for Home Depot, the premium price tag is worth it. Non-GAAP (adjusted) earnings per share figure has soared in recent years, compounding at an average annualized rate of 16.7% over the last three years. The company's dividend has risen at an even faster rate, increasing an average of 25% annually over this same time frame.

Like Kroger, Home Depot's importance to U.S. citizens became particularly clear during the coronavirus. The company was similarly deemed an essential business, and sales growth accelerated. First- and second-quarter fiscal 2020 comparable sales increased 6.4% and 23.4%, respectively. This compares to full-year fiscal 2019 comparable sales growth of 3.5%. 

Buyers of the stock today will get a dividend yield of about 2.1%.

While there's no guarantee that either of these stocks will turn out to be a strong performer over the next five years, their solid dividend yields and reasonable valuations certainly give them high odds of contributing nicely to a portfolio in terms of both appreciation and income.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool has a disclosure policy.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
HD
$320.08 (-2.41%) $-7.91
Kroger Stock Quote
Kroger
KR
$46.07 (-3.15%) $-1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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