Passive income is loosely defined as income generated without active involvement. Who doesn't want to make some extra cash with minimal effort? Three common sources from which investors can generate this type of income is ownership of rental property, licensing royalties, and stock dividends -- a favorite among investors such as Warren Buffett.
I've highlighted below two companies that share common characteristics for being the foundation upon which to build a successful portfolio. Investing in these stocks can put investors on the right path toward achieving their financial goals and enjoying the benefits passive income brings.
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Lowe's (LOW -0.14%) and Sherwin-Williams (SHW 0.36%) both serve a similar market and have experienced 50% growth in sales and earnings over the past five years. They also boast over 40 consecutive years of growing dividends, which can offer investors the benefit of compounding earnings to increase the total value of a portfolio through dividend reinvestment.
Lowe's has been increasing dividends for 47 years straight
Lowe's learned a key lesson during the pandemic -- get products into the hands of its DIY and Pro customers as quickly and conveniently as possible. In February, the company announced a partnership with Instacart, an online grocery platform, for same-day delivery of home-improvement products. The service offers buyers in Boston and Charlotte same-day delivery for over 20,000 different Lowe's products, with plans to introduce the program to other cities in 2022.
Expanded offerings like this should help fuel revenue growth. Executive Vice President of Stores Joe McFarland stressed on the latest earnings call how "improving our fulfillment capabilities will allow us to accelerate this growth and continue to gain market share."
Earlier this year, CEO Marvin Ellison had confirmed Lowe's is indeed gaining market share. Revenue surged 33% over the past two years, and though growth will slow in fiscal 2022, the average age of homes in the U.S. continues to climb, a long-term tailwind for the company. At the midpoint of management's guidance, Lowe's expects to deliver $13.35 in earnings per share this year, up 11%.
That strength on the bottom line fuels the retailer's annual dividend increases. Lowe's has been increasing its payout annually for 47 years, and when you have a track record like that, it earns you a spot in the distinguished list of Dividend Aristocrats -- S&P 500 companies that have increased their annual dividends for at least 25 consecutive years.
So if you invest $10,000 in Lowe's as of this writing, it will get you 55 shares of the stock. The current dividend pays out $4.20 per share on an annualized basis. Using the company's average dividend growth rate of 20% over the past 10 years, investors that choose to reinvest dividends could be looking at over $4,000 in passive income after just seven years, without the stock price gaining a single penny.
Sherwin-Williams is cashing in on the burgeoning home-improvement market
One of the products you can get at Lowe's is paint. Nearly 71% of homeowners take on projects that include painting, making paint the most commonly purchased home-improvement product. That makes paints and coatings global leader Sherwin-Williams an intriguing dividend stock for investors as the global home-improvement market is expected to grow at an annual rate of 6.4% through 2028.
Most people know Sherwin-Williams for its namesake brand, but customers that opt for other banners like Valspar, Minwax, or Thompson's are still putting revenue in the hands of Sherwin-Williams, which owns a broad portfolio of brands.
Its products are sold in nearly 4,500 stores across the Americas and the Caribbean. First-quarter revenue increased 7.4% year over year, driven by the performance coatings group, which saw double-digit growth thanks to higher volumes and pricing. Unfortunately, that didn't help offset inflation's effect on the costs of raw materials, which led to a year-over-year decline in net income.
Be that as it may, CEO John Morikis said demand remains strong in the latest press release. Once price increases kick in to offset higher costs, the company should see plenty of growth. Expect full-year earnings to meet previous guidance of $9.45 per share at the midpoint, which represents a 16% increase over 2021.
Consistent growth, positive net income, and a growing market should allow this Dividend Aristocrat to continue its 42-year streak of increasing payouts. The company's $2.40 per share dividend yields 1%, but even at this modest level, a $10,000 investment today would still give shareholders over $4,000 of passive income after 12 years, given the stock's 10-year dividend growth rate of 17%. And again, that's without a single dollar of price appreciation for the stock itself.
