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2 Dividend Stocks to Buy in 2022 and Hold for the Next Decade

By Parkev Tatevosian, CFA – Dec 31, 2021 at 4:15AM

Key Points

  • Target has a 50-plus year history of annually increasing its quarterly dividend.
  • Along with a steady and growing dividend, Home Depot's share price is up 170% in the past 21 months.
  • Each retailer has proven they can generate the profits needed to increase dividends over the next decade.

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These two retailers have done an excellent job increasing revenue and profits over the long run.

Home Depot (HD -0.31%) and Target (TGT 0.06%) are two retail giants with a long history of generating excellent profits in good times and bad. They also have a more recent history of generating incredible stock price appreciation. But part of investing is buying stocks with a focus on anticipated future performance. Can these two dividend stocks keep it up over the next decade?

Let's take a closer look at these two companies and see whether they deserve a spot in the portfolios of dividend-seeking investors in 2022 and beyond. 

Two people painting a wall.

Image source: Getty Images.

1. Target 

Speaking of mature companies, Target was founded in 1902. The Minneapolis-based corporation has thrived since the pandemic onset. It was deemed an essential retailer and allowed to stay open while nonessential businesses were forced to close. That factor, among others, caused Target's sales to surge. More impressively, sales have kept rising even as economies have reopened. Indeed, sales in the trailing 12 months are 48% higher than the previous 12 months.

One strength that has allowed Target to thrive during the pandemic could enable it to do well over the rest of the decade. It has developed an excellent omnichannel shopping experience. Consumers can shop at a Target store, on its mobile app, or its website. They can choose from multiple options on how to receive their order, including standard free delivery to their home, picking it up inside a Target store, driving up to a Target parking lot and having an employee deliver it to their car, or same-day delivery within hours of purchase for a small fee. 

The multiple options have resonated well with customers and their unique preferences. Target's same-day services in particular have driven over $6 billion in sales growth in the last two years. It can also cost less for Target to fulfill orders through these new methods versus the traditional standard free delivery to customers' homes. That can partly explain why management is forecasting Target will generate an operating profit margin of over 8% in the fiscal year 2021, its highest in the last decade.  

Importantly, dividends are paid out of profits. Therefore, dividend investors could benefit from Target's increasing sales that are boosting profit margins. Management recently increased Target's quarterly dividend by 32.4% to $0.90 per share. That increase marks the 50th straight year of annual dividend increases for the retailer, qualifying it as a Dividend King.

The sustainability of Target's per share dividend is further strengthened by the fact that Target generated a free cash flow per share of at least $4 every year since 2014. Of course, its free cash flow has surged since the pandemic onset, which is even more reason supporting its dividend and potential increases in the coming years.

Target's payout is generating a dividend yield of 1.36%, which is in line with the S&P 500 as a whole. For both Target and the S&P 500, the relatively low yield is more a reflection of the strong price performance recently artificially lowering the yield. Continued increases to the per-share dividend could raise that yield higher for investors who buy the stock today and hold through the decade. 

2. Home Depot 

Like Target, Home Depot has thrived since the pandemic's onset. Through a combination of government-mandated business closures and personal decisions, folks have been spending a lot more time working and learning from home. As a result of rapidly evolving lifestyles, folks have decided to make changes to their home. 

In the nine months ended Oct. 31, Home Depot's sales reached $115 billion, up 15.6% from the same period the year before. That's more than double the annual 6.9% revenue growth Home Depot achieved over the last decade. Over the next decade, look for the annual revenue growth rate to hit closer to the past decade's average than to maintain that double-digit rate. Still, the long-run growth rate has been strong enough for Home Depot to deliver compounded earnings-per-share growth of 19.5% during the same timeframe.

That EPS growth rate should be plenty enough to support Home Depot's quarterly per-share dividend of $1.65. At a stock price hovering around $412, it has a dividend yield of 1.6%, which is not too shabby for income-seeking investors. Like Target, Home Depot generates sufficient free cash flow to support a stable and growing dividend. In every year since 2014, Home Depot generated more in free cash flow than it paid out in dividends (see chart). 

A chart showing Home Depot's free cash flow and dividend per share.

Data By YCharts.

Note too, that the yield is a bit depressed lately because of the strong stock price appreciation Home Depot has seen over the past couple of years. The stock price is up roughly 170% since hitting March 2020 lows at the start of the pandemic. The price appreciation also shows very little sign of slowing. 

Investor takeaway

Target and Home Depot are both excellent businesses that have consistently increased revenue and profits over the long run. The companies are in a good position to do well in the next decade and deliver consistent dividends throughout. Target's and Home Depot's dividend yields may be modest at 1.36% and 1.6%, respectively, but that is due to both stock prices appreciating significantly in the last two years.

For those reasons, Target and Home Depot are two dividend stocks you can buy and hold for the next 10 years. 

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

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