If you've got money available to invest, building a portfolio of high-quality dividend stocks can be a great way to generate passive income and also open the door for capital gains. For income-seeking investors, Verizon (VZ 0.40%) and Home Depot (HD +3.63%) could be big winners.
The two stocks sport dividend yields of 8% and 2.6%, respectively. As such, splitting an investment of $100,000 evenly between them would give you an average yield of 5.3%, giving you about $5,300 in passive income in the coming year. Two Motley Fool contributors think that's just the beginning of the reasons why making these stocks the foundation of a dividend portfolio could be a smart move. Here's what they had to say about these two passive income producers.
NYSE: VZ
Key Data Points
Verizon trades at low multiples and offers a huge yield
Keith Noonan: Even though the broader market rallied in 2023, Verizon still managed to slide roughly 19% year to date. At approximately $32 per share, the stock is trading at a 10-year low.
Admittedly, competitive pressures are narrowing the company's growth opportunities, its wireline business continues to decline, and its debt load looks more concerning in today's higher interest rate environment. On the other hand, the shares are priced at attractive levels for value and income investors.
Valued at less than 7 times this year's expected earnings, Verizon is on sale at bargain-basement prices. There's significant capital appreciation potential here, which sweetens the deal beyond the stock's stellar dividend profile.
VZ PE Ratio (Forward) data by YCharts.
Verizon's 16-year streak of payout hikes is the longest of any major U.S. telecom. And with its yield sitting at roughly 8% at the current share price, the company's overall dividend profile is hard to beat.
Of course, the company's yield and payout history wouldn't mean as much if a big dividend cut was coming in the near future -- but that doesn't appear to be the case. Last year, Verizon paid out $10.8 billion in dividends to shareholders, but the $14.1 billion in free cash flow that it generated was more than enough to fund the distribution.
Thus far, it looks like the business is on track to post significant cash flow growth this year. In the first quarter, free cash flow came in at $2.3 billion, easily topping the $1.3 billion it recorded in the prior-year period.
Through its efficiency initiatives, Verizon expects to be able to deliver between $2 billion and $3 billion in annual cost savings over the next two years. In addition, the company has been able to cut back on its C-band wireless spectrum spending now that much of the necessary infrastructure and assets are in place for its 5G network.
With its dividend yield at an all-time high, Verizon stock looks like a bargain despite the challenges the company faces.
Home Depot is arguably the best home improvement retailer
Parkev Tatevosian: Home Depot has raised its dividend payout for 14 years straight and at the current share price, it yields roughly 2.6%. The retailer thrived during the pandemic when people stuck at home took on more home improvement projects. Longer term, Home Depot has held its own as many of the types of products it sells (heavy, bulky, gotta have it now) make it difficult for e-commerce retailers to compete with it.
Indeed, Home Depot has grown its revenue from $78.8 billion in 2013 to $157.4 billion in 2022. That was a compound annual growth rate of 7.7% -- an impressive figure for a brick-and-mortar retailer. More importantly, its operating income soared by an even greater percentage over the same time frame from $9.2 billion to $24 billion.
For income investors, corporate profits are crucial because dividends are paid out from profits. Sure, a company can pay dividends temporarily from its cash on the books or by borrowing, but profits are the only sustainable long-term source for dividends. It should be no surprise that Home Depot has increased its dividend per share from $1.56 in 2013 to $7.60 in 2022. Home Depot's consistent profit growth can go a long way to assure passive income investors that those dividend payments are sustainable.
NYSE: HD
Key Data Points
To make the case for Home Depot stock even more compelling, the stock is not prohibitively expensive at the moment. Investors can buy this premium home improvement retailer at a forward price-to-earnings ratio of 19.9, which hovers just below the S&P 500 average.
These dividend stocks look like winners
A $100,000 investment split evenly between Verizon and Home Depot can be expected to provide roughly $5,300 in passive income in the next year. Additionally, both companies have solid track records of payout hikes, so there's a good chance that additional increases could push your dividend haul above that level.
But of course, you don't need to invest $100,000 to enjoy the passive income-generating power of these dividend stocks. For example, a $10,000 investment would still allow you to rake in $530 on an annual basis. Regardless of how much you invest in them, choosing top dividend stocks can help balance your portfolio and provide a dependable source of cash. And Verizon and Home Depot look non-prohibitively valued at today's prices.
