Dividend stocks are always popular, and they belong in any well-diversified portfolio. But more investors have become interested in dividends, which provide a certain amount of stability -- and income -- in this volatile market.
Some dividend stocks are better than others. That can mean several things, such as how high the yield is, how reliable the dividend is, and whether or not the dividend is increasing. Coca-Cola (KO -0.13%), Costco (COST 0.29%), and Home Depot (HD 0.18%) are three top dividend stocks to buy today.
1. The classic Dividend King
Coca-Cola is a Dividend King, which means it's been paying and raising its dividend for at least 50 years. The company owns iconic brands that breed strong consumer loyalty and generate steady and high levels of cash. These in turn allow it to try new ventures and pay its generous dividend.
Coke was hit hard at the beginning of the pandemic, more so than others, since its away-from-home category accounted for around half of total sales. But through its efficient distribution channels and manufacturing networks, trained through decades of improvements and upgrades, it was able to quickly adapt and meet changing demand.
With an organizational restructuring and brand consolidation, the company streamlined further to face a new landscape, and it's as well-positioned as ever to maintain its beverage dominance and drive higher sales.
It has posted double-digit sales growth for the past six quarters, including a 10% year-over-year increase in the 2022 third quarter, illustrating how well it has recovered and moved forward from the initial declines. It even managed to grow earnings per share (EPS) 14% despite the tough operating environment.
Coca-Cola's dividend usually yields around 3%. At the current price, it yields 2.8%. That's because yield is inversely proportional with stock movement, and Coca-Cola stock has done exceptionally well this year, gaining 8% against the backdrop of the S&P 500 down 14%. Coca-Cola's dividend is as reliable as they come, and its high yield and growth make it one of the best on the market.
2. The special dividend
Costco isn't usually renowned for its dividend, but it's a great stock to own for other reasons. The company has a differentiated model with its fee-based membership program and rock-bottom prices. This drives high volume, especially when there are economic challenges. Costco has enjoyed unusually high sales growth for the past two years, and although that continued when inflation began to explode, it's beginning to slow down.
It was still strong in the most recently reported quarter, the fourth fiscal quarter (ended Aug. 28), with a 16% sales increase over last year, including a 13.7% rise in comps. However, Costco reports monthly sales, and growth has decelerated each month since then through to a 5.7% sales increase over last year in November, with a 4.3% rise in comps.
Costco stock fell after the November report came out, but that looks like a great opportunity for investors. Costco stock had become expensive, trading at a high price-to-earnings ratio. That's come down a bit to 38 at the current price. Costco stock has been expensive because it has delivered high gains for investors in the past, and it's a strong bet for more.
Costco's dividend yields only 0.68% at this price, but it has been growing for many years. What make it stand out, though, is the special dividend that management issues every few years, most recently in 2020 for $10. That makes the yield much juicier -- and although management hasn't announced a new one yet, it did say it would issue it again when the time is right.
3. The right combination of yield, growth, and reliability
Like Coca-Cola and Costco, Home Depot has developed a reliable, robust operating model that balances growth in the right places with cost efficiencies, making it a retail superstar. It has expanded to become the largest home improvement chain in North America, and shareholders can count on it to keep racking up sales and turning them into cash to fund the strong dividend.
You don't have to look further than how Home Depot managed through explosive pandemic growth and the shift to decelerating growth to see how capable it is at meeting customer demand with balanced inventory.
After some of its best quarters ever, it's still demonstrating competitive progress. In the third quarter (ended Oct. 30), sales increased 5.6%, and comps increased 4.3%. EPS rose from $3.92 to $4.24.
Home Depot stock is down 21% this year, underperforming the market. That looks like a reaction to the state of retail and the overall economic climate, as well as the company's growth slowdown. At this price, shares trade at the low price-to-earnings ratio of 19, putting the stock into bargain-basement territory. Also, at this price the dividend yields 2.4%. Home Depot has raised its dividend for the past 12 years, and it's a great stock to own for its growth potential as well as its steady and growing dividend.
