Investors often have to make a tough choice between stock price returns and dividend income. The best dividend payers are usually well-established businesses, and so the yield size and sales growth prospects of those companies can be small.
On the other hand, quickly expanding companies rarely have excess cash available to send back to shareholders. A great income investment would include a mix of solid growth prospects and a robust dividend.
With that goal in mind, let's look at two stocks that meet this high bar today: Garmin (GRMN 0.15%) and Home Depot (HD -1.88%).
Image source: Getty Images.
1. Garmin
It might be the company's focus on consumer technology that keeps Garmin off of many investors' watchlists. But the GPS device giant deserves a premium spot.
Sure, it competes in a few tough industry niches. Its automotive navigation segment has been shrinking for years, and its aviation division was hit hard by the COVID-19 pandemic. But Garmin's deep portfolio also includes dozens of hit brands across categories like wearable fitness, smartwatches, and high-performance sports gear. That's keeping overall sales churning higher.
Garmin Revenue (TTM), data by YCharts.
A steady track record of innovation in those segments helped Garmin secure record sales and rising profitability in each of the three fiscal years heading into 2020 despite soft spots in some parts of the business. The company is even on track to meet its initial growth outlook for this year despite the retailing pause that harmed the business in the second quarter. Add a 2% dividend yield based on today's stock price, and you've got a formula for solid long-term returns from a well-run tech leader.
2. Home Depot
It turns out that Home Depot was ideally situated for the pandemic, which lifted demand in the home improvement industry even as volume shifted to businesses with robust multi-channel selling platforms. That environment has helped push sales up to $100 billion over the last nine months compared to $84 billion in the prior-year period. Home Depot has generated roughly $14 billion of operating income from that haul, or 14.2% of sales, compared to Lowe's 11.7% year-to-date operating margin.
Home Depot Operating Margin (TTM), data by YCharts.
Lowe's is currently closing the margin gap with its biggest rival, but Home Depot investors don't need to spend much time worrying about that competition. The industry leader has several competitive advantages, including surging cash flow that it can direct toward protecting its position. CEO Craig Menear and his team recently put some of those resources to work by acquiring HD Supply for $8.7 billion. Before the pandemic hit, much of Home Depot's cash flow was going toward stock repurchases and dividends.
Home Depot also pays higher dividends than Lowe's. It aims to pay out 55% of annual earnings as dividends, compared to 35% for its smaller rival. That aggressive posture raises the risk of a dividend cut if economic conditions turn sharply lower over the next few quarters. But shareholders made out well by simply holding through the last national housing market slump. There's every reason to believe Home Depot could navigate through another industry recession if one occurs.
It's anybody's guess what 2021 holds: a recovery or a gathering economic slump. That's why it makes sense to invest in strong businesses like Home Depot and Garmin while benefiting from the extra cushion that their 2%-plus annual dividend yields provide.
