Home Depot (HD 0.74%) and Domino's Pizza (DPZ -1.68%) have thrived since the onset of the pandemic. The rise in Domino's sales was not the least bit surprising; restaurants were closed for in-person dining, so folks had fewer options for meals and didn't always want to prepare food themselves.
Home Depot's boom caught investors a little off guard. It wasn't expected that folks would all of a sudden have more interest in do-it-yourself projects. Nevertheless, both dividend stocks saw a rise in sales and profits, which enhanced their ability to pay even more dividends. In March, let's look at which dividend stock is better for income investors.
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Domino's Pizza
Even though Domino's experienced a boom in sales at the beginning of the pandemic, the company was doing well even before. The tomato pie provider grew revenue at a compound annual rate of 10% in the past decade. More importantly, revenue flowed to the bottom line, and it compounded earnings per share at a 24% rate in that same time.
I say more importantly because dividends are paid out of earnings. Without sufficient profits to pay dividends, a company must dip into savings or borrow funds to support the payments.
Domino's first paid a dividend in 2013 and then aggressively increased the payment. Its first dividend in 2013 was for $0.80 per share; by 2020, it had quickly risen to $3.12 per share.
Due to its healthy earnings growth, Domino's has room to keep growing its dividend. The percentage of earnings it paid out in dividends (the payout ratio) was 26% most recently.
Admittedly, its dividend yield of 0.87% is relatively modest, but if it keeps growing the dividend per share, today's investors could expect a higher payment over time.
Home Depot
Like Domino's, albeit less pronounced, Home Depot grew revenue at a healthy rate even before the outbreak. From 2013 to 2022, the company increased revenue at a compound annual rate of 7.9%. Similarly, it increased earnings per share at a compound annual rate of 20%.
Home Depot has a much longer history of paying a dividend than Domino's. Indeed, Home Depot's dividend goes back to 1987. More recently, it has increased the dividend per share from $1.16 in 2013 to $6.60 in 2022. Income investors who bought its stock in 2013 are getting five times the dividends they got in their first year.
Home Depot has less room than Domino's to keep growing its dividend because its most recent payout ratio reached 42.5%, and also because it is growing earnings per share at a slower rate. That said, Home Depot boasts a dividend yield of 2.1%, more than double the rate of Domino's.
The verdict
Both are excellent stocks that are likely to increase the wealth of shareholders who buy and hold them for the long term. However, if you had to pick only one of these dividend stocks to buy in March, it should be Home Depot.
Domino's is growing earnings faster, which indicates better dividend growth in the future. But Home Depot is trading at a discount to Domino's which more than compensates for the difference in potential (see chart above).
