Building positions in dividend stocks can help investors overcome market volatility and generate reliable passive income streams.
If you're looking to add dependable, income-generating stocks to your portfolio, two Motley Fool contributors believe that you would be smart to start building positions in AT&T (T 2.84%) and Home Depot (HD -0.19%) right now. Investors who divide $10,000 evenly across these two dividend stocks can look forward to annual income generation of $490 per year, and both stocks also have the potential for significant stock price gains.
AT&T is a beaten-down bargain stock with a big yield
Keith Noonan: This year has been tough for AT&T. Against the backdrop of a 15% rally for the S&P 500 index across 2023's trading so far, the telecom giant's share price fell by roughly 15.5%. The company's underperformance becomes even more stark when viewed across a longer timeline. Ma Bell's stock is down 38% over the last five years, while the S&P 500 climbed by 50%.
Between the failure and divestiture of the company's Time Warner acquisition, the spinoff of its ailing DirecTV satellite television business, and the ongoing declines for the company's wireline phone business, the telecom giant dealt with some substantial challenges over the last half-decade. Rising interest rates also added to the pain of the company's high debt load.
On the other hand, AT&T stock looks dirt cheap at today's prices, and it pays a dividend that's hard to beat. Trading at just 6.4 times this year's expected earnings and sporting a roughly 7.2% yield, AT&T looks like a smart buy for value and income-focused investors.
T PE Ratio (Forward) data by YCharts.
Despite the headwinds that hindered its performance, the pillars that were repositioned to make up the core of AT&T's streamlined business actually look quite sturdy. The company added 326,000 net postpaid phone accounts and 241,000 net fiber customers last quarter, and the combination of momentum for its wireless phone and high-performance internet pushed sales up roughly 1% year over year to $29.9 billion.
Admittedly, its sales are growing at a very slow pace, but the business continues to be a cash-generating machine. With the help of cost-saving initiatives, AT&T is on track to generate at least $16 billion in free cash flow this year -- nearly twice what it will distribute in dividends.
AT&T may not be an exciting stock, but it's very cheaply valued. For investors seeking companies that can reliably serve up big dividends, the telecom giant stands out as a worthwhile portfolio addition at today's prices.
Home Depot increased its dividend payments substantially
Parkev Tatevosian: When looking for dividend stocks to build passive income, a key concern is how the business is likely to fare over the long term. A solid business is more likely to remain profitable long-term and that is more likely to result in a solid stock. Home Depot is one such business. At its current share price, the stock offers a dividend that's yielding roughly 2.6%.
The home improvement retailer consistently manages to withstand competition from online retailers and brick-and-mortar rivals. Passive income investors should feel reassured by Home Depot's bottom-line growth. The company's earnings rose from $3.76 per share in 2013 to $16.69 per share in 2022.
Home Depot is passing along those increased earnings to its shareholders, increasing its dividend payment meaningfully in the last decade. In 2013, Home Depot paid a dividend per share of $1.56. By 2023, that figure had risen to $7.60 -- roughly 5 times more.
Dividends can only be sustained over the long term by earnings. If a household spends more than it brings home in income, that lifestyle is not sustainable. A business is similar. It can pay out more in dividends than it's bringing in via earnings in the short term, but eventually, it will run out of savings and exhaust its borrowing capacity.
Given its track record of warding off competition, plus its excellent dividend and earnings growth, Home Depot is a perfect stock for investors looking to build passive income.
