Investors looking to generate passive income have hit a gold mine with Home Depot (HD 0.74%). One of the best ways to boost passive income is to buy stocks that pay dividends. That's why Home Depot has been so good to passive income investors; it has increased its dividend nearly sixfold in the past decade.
Passive income investors who bought 1,000 shares of Home Depot stock in 2013 have seen their dividends increase from $1,160 to $6,600. Let's look at how Home Depot accomplished that feat and if passive income investors of today can expect something similar in the future.
HD Dividend Per Share (Annual) data by YCharts
Home Depot has rewarded passive income investors
Of course, Home Depot has thrived since the pandemic's onset. The home has become an even more critical aspect of people's lives as they work, learn, and entertain at home more often. In its last two years, Home Depot's sales have surged by 20% and 14.4%, respectively. Meanwhile, earnings per share rose by 16.5% and 30%. But this was not the start of Home Depot's success.
The company was growing revenue and earnings robustly even before the outbreak. Over the last decade, Home Depot has grown revenue at a compound annual rate of 7.9%. More importantly, earnings per share have grown at a rate of 20.2%. I say "more importantly" because dividends are paid out of profits. For investors looking to generate passive income, a company that is growing earnings rapidly offers great potential. Home Depot's excellent earnings growth explains why it grew its dividend payment from $1.16 in 2013 to $6.60 in its most recent fiscal year.
HD Payout Ratio data by YCharts
Home Depot's payout ratio, which measures the percentage of earnings paid in dividends, was 43% as of its most recent update in 2022. That means the company paid less than half its profits as dividends. The rest of the money is reinvested into the business.
For passive income investors interested in Home Depot, it can sustain its robust dividend payment with a margin of safety when profits fluctuate. That's great news because the last thing you want when building a recurring income stream is decreases or pauses in the payments.
Is it too late to buy Home Depot stock?
The short answer is no. Home Depot's stock price is down 30% off its highs. The market is worried about Home Depot's prospects in the near term while economies reopen and consumers shift spending away from home improvement toward restaurants and travel.
HD Price to Free Cash Flow data by YCharts
Home Depot's stock price fall has it trading at a price-to-free cash flow ratio of 28 and a price-to-earnings multiple of 19, a relatively fair valuation when measured against its averages in the previous five years. The company's reasonable price, robust earnings, and dividend growth make it an excellent choice for investors looking to build passive income.
