With a combination of high profitability, generous cash returns to shareholders, and reasonable valuations, Lowe's (LOW -0.35%) and Pool Corp. (POOL -0.64%) offer outsized compounding potential to investors willing to buy and hold for the long haul.

Despite posting 525% and 656% returns over the last decade, Lowe's and Pool still trade relatively inexpensively. 

Consider their price-to-earnings (P/E) ratios and dividend yields compared to their five-year averages.

POOL PE Ratio Chart

POOL PE Ratio data by YCharts

With Lowe's and Pool having grown their dividends for 59 and 12 years, respectively, these dividend yields being above their recent averages indicates a cheaper valuation than usual. Further backing this theory, both companies' P/E ratios trade at a discount.

However, valuation alone does not make these stocks attractive over the long term. Let's look more closely at each dividend grower's immense profitability and steady operations and see why they look set to continue their track record of success far into the future.

1. Lowe's

With more than 50% of the homes in the United States older than 41 years old -- the highest figure since World War II -- it is clear that home improvement retailer Lowe's has a critical megatrend working in its favor. However, due to many temporary macroeconomic and housing-related headwinds, Lowe's current stock price is virtually the same as it was a year ago.

As people continued to rein in discretionary spending with the threat of a looming recession, the company saw same-store sales decline 2% in the fourth quarter compared to the prior year. Despite this slight drop, Lowe's recorded an impressive 28% increase in earnings per share (EPS) in Q4 after removing the tax costs tied to the sale of its Canadian operations.

Better yet, management is guiding for between $13.60 and $14 in EPS in 2023 -- meaning that it trades with a forward price-to-earnings (P/E) ratio of merely 14 at the midpoint of these expectations. 

Lowe's return on invested capital (ROIC) of 31% makes this cheap-looking valuation all the more exciting. It ranks 15th best among the S&P 500's 59 consumer discretionary stocks.

Chart showing Lowe's return on invested capital rising since 2014, with recent dip.

LOW Return on Invested Capital data by YCharts

ROIC measures a company's profitability compared to its debt and equity totals, with high and rising figures historically delivering outperforming returns for investors.

Thanks to this outsized profitability, Lowe's is well-equipped to extend its 59-year dividend increase streak -- particularly considering that it only pays out 29% of its net income. Highlighting the power of the company's strong dividend growth over recent years, had you bought and held shares since 2013, you would already be receiving dividend payments yielding 11% on your cost basis.

Additionally, any income not paid back to investors through dividends, used for capital expenditures or repay debt, goes to Lowe's massive share repurchase program. Having reduced its outstanding shares by 45% over the last decade, the company has a long track record of juicing its EPS figures, even in difficult years like 2022.

As Lowe's professional segment looks to post double-digit growth for the 12th consecutive quarter, look for it to thrive as the 1.5 million to 2 million undersupply of homes in the U.S. helps lift the up-and-coming unit to new heights. 

Ultimately, Lowe's is a great buy-and-hold forever investment buoyed by two tailwinds driving long-term sales, substantial profits, and an incredible track record of returning cash to shareholders.

2. Pool Corp.

In the face of new pool construction in the U.S. declining 16% in 2022, pool equipment distributor Pool Corp. grew sales and EPS by 17% during the year. These strong results came amid rising interest rates, soaring inflation, and a volatile housing market -- highlighting the company's resilient operations.

It generates 60% of its revenue from maintenance and repairs and 20% from renovations and remodels, so Pool Corp. isn't forced to rely upon new pool construction to drive growth. However, despite these largely recurring sales and the company's continued growth, Pool remains 31% below its 52-week highs. 

Now trading at just 18 times earnings, Pool's 27% annualized EPS growth since 2013 looks attractive. Furthermore, the company's ROIC of 29% is the 10th best among 69 stocks in the industrial sector of the S&P 500. 

Led by this outsized profitability, Pool Corp. has more than quintupled its dividend payments over the last decade -- all while lowering its share count by 16% at the same time.

Charts showing Pool Corp's shares outstanding falling and dividends rising since 2014.

POOL Shares Outstanding data by YCharts

In addition to this impressive track record, Pool may still be in the middle chapters of its growth story. The company recently expanded into the do-it-yourself pool market through its $790 million acquisition of Porpoise Pool and Patio in late 2021. The newly acquired company's Pinch a Penny franchises offer an intriguing growth runway for Pool Corp., as 70% of pools are still maintained directly by the homeowner.

While it may take a year or two for the housing and pool market to ramp back up to full speed, Pool's outsized allocation of sales from non-discretionary purchases makes it a terrific dividend growth stock to buy at today's deep discount.