Dividends are a form of passive income that can get overlooked as a component of returns in the stock market. There are certainly growth stocks that don't pay dividends that can deliver great returns over decades, but when the markets get volatile, it pays -- literally -- to own growing companies that dish out some cash to their shareholders.
Three Motley Fool contributors recently picked Home Depot (HD 0.94%), eBay (EBAY 1.32%), and Levi Strauss (LEVI 0.19%) as great dividend stocks to consider right now. If you invested $5,000 in each stock, it would yield total income of $300 over the next year based on each company's current quarterly dividend payment. Here's why these companies are good investments.
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Super reliable plus high-yield equals great dividend stock
Jennifer Saibil (Home Depot): Even the best stocks have their worst moments. Home improvement giant Home Depot experienced this in 2019 when sales and profitability suffered as it invested in growth through its digital channels. But efforts to please shareholders in the short term shouldn't come at the expense of long-term growth, and top companies know this. To drive long-term value, there's sometimes near-term pressure. The market is fickle in the near term, with daily upticks and downticks. To succeed in the stock market, investors need to filter out the noise and focus on long-term goals.
That leads to Home Depot's performance so far in 2022, which as you might have guessed, hasn't been its best. Its stock is down 25% this year. At the current price, shares trade at less than 20 times trailing-12-month earnings. That would be meaningless if there weren't much of a future. But Home Depot didn't become the largest home improvement retailer in the world with a mediocre strategy and team. It's a top company with robust growth catalysts, which means shares are a great deal when you can buy them on the dip. Not to mention that at this price, its dividend yields 2.45%.
Part of the reason for the dismal performance this year so far sprouts from the company's prior success. It enjoyed high growth throughout the pandemic when people stayed in and focused on home improvement. Home Depot's aforementioned investments in digital growth carried it through, and it was ready to handle the surge in demand. Now it faces tough comps from last year as well as people spending in other areas. But that will eventually balance out, and Home Depot has several growth catalysts for the near term. These include a hot housing market, which means shoppers will need to spend on home improvement, as well as the shift to working from home.
Management is guiding for sales growth to be "slightly positive" in 2022, which accounts for some of the stock decrease. But investors can be confident in Home Depot's long-term growth prospects, and in the meantime (and after), shareholders can enjoy secure passive income from dividends.
eBay only recently started paying a dividend, but the payment has excellent potential
Parkev Tatevosian (eBay): Investors looking to generate passive income have an excellent opportunity with eBay. The e-commerce and auction site has grown earnings per share at a healthy rate as revenue has grown by double digits for two straight years. The near term may be volatile as economies reopen and consumers change their spending habits. But over the long run, eBay will benefit from a rising share of spending moving online.
eBay has increased earnings per share at a compound annual rate of 23.6% in the last decade. If it can maintain anywhere near that level of earnings growth, it can allocate a growing share of those profits to dividends. Recall that dividends are paid out of earnings. Therefore, eBay's robust earnings growth can support a steadily growing dividend payment over time. The company only started paying a dividend in 2019 and it increased from $0.56 per share to $0.72 in 2021.
Speaking of its dividend payout ratio, a metric that measures the percentage of profits a company pays in dividends, eBay boasted a rate of just 3.42%. That means it has plenty of room to increase its dividend without dipping into savings or borrowing to support the payment.
EBAY Price to Free Cash Flow data by YCharts
Trading at a price-to-earnings ratio of 2.7 and a price-to-free-cash-flow multiple of 16.4, eBay is far from expensive. The inexpensive valuation combined with solid earnings growth and a low dividend payout ratio are excellent reasons why income-seeking investors can buy eBay stock.
Levi's is enjoying high demand for denim
John Ballard (Levi Strauss): If you're looking for an undervalued reopening play, look no further than the classic jeans brand. Levi's long heritage dates to the gold rush in the 19th century. That means Levi's has seen its fair share of economic booms and busts, inflation, wars, and ongoing battles with competitors. Despite the recent spike of inflation and tight supply chains, Levi's just posted another strong quarter of top- and bottom-line growth, and the stock offers an attractive dividend yield of 2%.
Revenue grew 22% year over year in the fiscal first quarter, which ended in February. Most impressive were improved margins that pushed net profit up 37% over the year-ago quarter.
Improving business performance bodes well for potential increases to the quarterly dividend. The company declared a dividend payment of $0.10 per share to shareholders, which is payable on or after May 24 to shareholders of record at the close of business on May 6. That's an annual payout of $0.40, so an investment of $5,000 in the stock would translate to annual income of $100.
Levi's has paid a dividend every year since 2008. It also pays out only 21% of profits in dividends, so there is room to grow the dividend just by raising the payout ratio.
On top of an attractive dividend yield, the stock is cheap, trading at a price-to-earnings ratio of 12.6 based on the consensus analyst estimate for fiscal 2022 (which ends in November). Rising demand for denim could lead to market-beating returns for investors from these levels.
