Please ensure Javascript is enabled for purposes of website accessibility

Starved for Income? Consider These 2 Dividend Stocks

By Parkev Tatevosian - Jun 30, 2021 at 7:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Retirees are burdened with some of the lowest interest rates in decades, making it difficult to find income from savings.

Retirees are finding it harder to earn a decent return on their savings. For instance, yields on U.S. government bonds are hovering at their lowest levels in more than 50 years. That means income-dependent investors need to look elsewhere to supplement their cash flow in retirement.

Considering a dividend stock instead of a government bond provides a couple of benefits. For one, you can find stocks that pay dividend yields larger than the yields on government bonds. And second, you can find companies that increase their dividend payments over time -- compared to the static payment that a government bond provides. 

It's important to remember that companies sometimes decrease or pause their dividend payments -- often when they find themselves in financial difficulty. Therefore, investing in dividend stocks may not be as safe as investing in government bonds.

If you do decide to make the jump and add dividend stocks to help supplement retirement income, two stocks -- Home Depot (HD -0.09%) and Costco (COST 1.59%) -- are worthy of consideration. Here's why.

Jar of coins labeled Retirement with plant sprouting out.

Image source: Getty Images.

1. Home Depot  

Home Depot's stock currently pays out a quarterly dividend of $1.65 per share. That means that for every share of Home Depot stock you own, you will get dividend payments of $6.60 per year. That's a return on investment of about 2.08% at the current stock price. What's nice about Home Depot's payout, however, is that this home improvement retail giant consistently increases its dividend.

From 2012 to 2021, Home Depot has increased the annual dividend almost six-fold from $1.04 per share to $6.00. And there is no reason to believe that Home Depot will not continue increasing its dividend through the next decade and beyond, although it may not grow at the spectacular rate it did in the last decade.

Dividends are paid out of a company's earnings, and so you will be glad to hear that Home Depot's earnings per share grew at a compounded annual rate of 19.5% in the last 10 years. That has allowed Home Depot sufficient excess capital to reinvest in its business and increase the dividend payment at the same time. Indeed, Home Depot's payout ratio, which measures dividends as a percentage of earnings, has remained at roughly 45% from 2012 to 2020. That payout ratio is considered to be quite sustainable.

A chart showing Home Depot and Costco dividend metrics.

Data source: YCharts.

2. Costco 

Costco has an interesting dividend strategy. In addition to paying a regularly recurring dividend, it pays a special dividend once every few years. If you own Costco's stock, the regular quarterly dividend now sits at $0.79 per share. That works out to an annual dividend payment of $3.16 per share. It also represents a 0.79% dividend yield at the current stock price (a yield that is relatively low in comparison to the S&P 500 average). Costco has plenty of free cash flow to maintain these payments as its current payout ratio is a very sustainable 35.7%.

Costco remains popular as a dividend stock because of the periodic special dividends it pays out. In December 2020, Costco paid a special dividend of $10 per share. Before that, Costco paid a special dividend of $7 per share in 2017.

Costco's business prospects have improved during the pandemic. It signed up millions of new members, who pay an annual fee for the privilege of shopping at one of its warehouses. And the company has gained a reputation over decades for providing famously competitive prices. That will make it difficult for any competitor to encroach on its business -- good news for long-term investors looking to ensure that the dividend income keeps coming. 

Investor takeaway 

Income investors should keep in mind that stock prices are generally more volatile than bond prices. It may very well be the case that your dividend stock decreases in price while maintaining the dividends it paid out over the time of your investment, thereby making your investment a total return loss. That is the risk that comes with looking for income through dividend stocks.

Still, it may be worthwhile to supplement your bonds with dividend stocks like Home Depot and Costco in the current low-interest-rate environment if you maintain a long-term investment outlook. That's because these two stocks have been solid price performers over the long term as well as paying out well on dividends. 


Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$545.75 (1.59%) $8.54
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$314.61 (-0.09%) $0.28

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.