Dividends are often overlooked when planning a long-term investment strategy. Yet over the past 50 years, dividend reinvestment generated 84% of the total return of the S&P 500 index, according to Hartford Funds. If you started with an initial investment of $10,000, reinvested dividends are the difference between ending up with $795,000 and nearly $5 million.
Three Motley Fool contributors selected Coca-Cola (KO 0.10%), Target (TGT 1.08%), and Home Depot (HD 1.07%) as attractive dividend stocks to buy right now. These are solid consumer brands that investors can't go wrong holding through retirement.
Popular drinks drive this unstoppable stock
Jennifer Saibil (Coca-Cola): Famed mutual fund manager Peter Lynch has advised investors to buy stocks of companies they know and love. For many people, that makes Coca-Cola a serious potential investment.
Coca-Cola has a thriving business in its popular beverage assortment, and it successfully responded to pandemic declines with restructuring and efficiency measures that helped it bounce back quickly. Despite its size -- $41 billion in trailing-12-month revenue -- it's still able to adapt to market conditions effectively. That has led to double-digit sales growth in the past five consecutive quarters, including after it already made up for the earlier declines.
And it's far from finished. Management still sees a huge addressable market to conquer in global markets. It says that it has 14% of the market share in developed countries, and only 6% in developing countries, which is 80% of the world population. It's planning to launch 1,500 new initiatives this year across 80 markets.
Beyond its ubiquitous cola and other drinks, Coca-Cola is known for its dividend. It's a Dividend King, and it has raised its dividend annually for the past 60 years. Its dividend usually yields around 3%, but it's slightly lower these days. At the current stock price, the dividend yields 2.7%. That's because this secure stock has posted an 8% gain this year, heartily outperforming the broader market.
The company was tested at the beginning of the pandemic when revenue plummeted and other companies cut their dividends to conserve cash. At that point, Coca-Cola both paid and raised its dividend even though its payout ratio reached above 100%.
Between its in-demand products, continued market opportunities, and demonstrated commitment to the dividend under strained conditions, Coca-Cola is well positioned to maintain and raise its dividend for years to come.
The bull's-eye is down, but not out
John Ballard (Target): Target's recent stumble over inventory issues and subsequent stock collapse is a great opportunity to buy shares of this leading retailer. The company is an elite dividend payer, having increased its dividend for 51 consecutive years.
Target stock plunged earlier this year after the company reported first-quarter results in May. The company has continued to post positive sales growth and traffic at its stores, but operating profit took a hit over excess inventory.
Demand has been particularly high among food and beauty categories, but management announced a significant inventory reduction plan in June amid decelerating demand in the economy. Despite the increase in same-store sales, Wall Street pays close attention to inventory levels. Too much inventory is not a problem for sales, but it can be devastating to the bottom line if the company is forced to mark down goods to move inventory out the door.
As expected, Target reported another quarter of positive comparable sales growth for the second quarter, but operating margin fell to a slim 1.2% over actions to reduce inventory and higher transportation costs. However, the stock is up a few points since the second-quarter earnings report, which signals that the bad news is priced into the stock's valuation.
The recent progress to reduce inventory could set the stage for much better operating performance in the quarters ahead, as management expects. The value in the stock is demonstrated by its above-average dividend yield of 2.31%. In June, the company announced a 20% increase to the dividend, bringing the quarterly payment to $1.08 per share. With Target, investors are getting a top dividend stock at an attractive price.
Home Depot has rewarded passive income investors
Parkev Tatevosian (Home Depot): Home Depot's stock can be an excellent place to start if you are looking for passive income. The home improvement retailer has thrived since the pandemic's onset, but the company delivered a solid performance even before the outbreak. Moreover, because Home Depot sells big and bulky items, it has greater protection against Amazon's expansionary ambitions.
In the last decade, Home Depot has compounded earnings per share at a 20.2% annualized rate. Notably, dividends are paid out from profits. Without sufficient earnings, a company couldn't sustain a dividend payment. For that reason and more, Home Depot's robust earnings growth is an attractive feature. Indeed, it has supported Home Depot's dividend payment increase from $1.16 per share in 2013 to $6.60 per share in 2022.
HD Payout Ratio data by YCharts
That means investors who bought Home Depot's stock in 2013 are getting nearly six times the dividend payment they received in their first year of ownership. Despite those substantial increases, Home Depot has room to keep expanding the dividend. Its dividend payout ratio, which measures the dividend payment in relation to income, has remained around or below 50% in the last five years. That gives the retailer wiggle room to sustain dividends even if profits were to decrease moderately.
Fortunately for passive-income investors, Home Depot's stock is not expensive when measured by the price-to-earnings (P/E) ratio. At a P/E of 19, Home Depot's valuation is below its five-year average.
