The Dow Jones Industrial Average is a prime stock-hunting ground for income investors. The 30 companies that populate this index are among the most profitable, most well-established businesses on the planet. Many of the Dow components regularly pay (and regularly raise) their dividends steadily -- some for decades.
There are often at least a few of these Dow components trading at a relative discount, too, which can boost new investors' potential returns and lift their yields. Home Depot (HD 0.93%) is my favorite pick in that category of stocks on sale today.
Here are three of the biggest reasons to buy this reliable dividend payer right now.
1. Home Depot's long-term outlook remains strong
It's no secret that consumer discretionary spending is declining as tighter household budgets lead to drop-offs in less essential purchases. On top of that, higher interest rates have crimped home sales and pressured the renovation budgets of new owners.
NYSE: LOW
Key Data Points
These negative factors haven't entirely derailed Home Depot's 2023, though. The company in mid-August affirmed its fiscal-year outlook that calls for sales declines of between 2% and 5% compared to fiscal 2022's 3% increase. Rival Lowe's (LOW 1.11%) is expecting a similarly modest decline this year.
Cyclical pullbacks are a regular feature of the home improvement industry, and they don't threaten Home Depot's bright long-term outlook. Fundamentals supporting its multiyear forecast include the nation's aging housing stock, demographic shifts bringing more people into the housing market, and strong housing prices. "We remain very positive on the medium-to-long term outlook," CEO Ted Decker told investors in August.
2. Home Depot manages efficient financials even in a downturn
Home Depot's leadership position in its industry translates directly into higher profitability. Its operating margin routinely lands above 15% of sales, even in tougher selling conditions like those that prevail in now. Lowe's routinely trails its larger rival in that metric, as well as in the key efficiency metric of return on invested capital.
HD Operating Margin (TTM) data by YCharts.
Investors who buy Home Depot stock now can also expect to see plenty of direct cash returns from it in 2023 and beyond. Management has been spending aggressively to reduce the outstanding share count, and it recently announced a new $15 billion stock repurchase plan.
Home Depot has been steadily raising its dividend payout since it was paused during the worst of the Great Recession. Last year's hike was 10%, and the retailer's strong cash flow to date (over $12 billion in the first half of 2023) suggests a similarly aggressive increase ahead for fiscal 2024.
3. Home Depot stock is priced right at the moment
Home Depot's shares were discounted this year as Wall Street focuses on the cloudy economic growth outlook for the next few quarters. The possibility of a recession developing in early 2024 has many investors avoiding consumer discretionary stocks. Home Depot is already seeing signs of softness in both its do-it-yourself segment and among professional contractors, whose project backlogs shrank in recent months.
This retailer thrived through many previous industry downturns, though, and has always emerged from them to set new annual earnings records. There's no reason to think that things will be dramatically different this time around. Shoppers remain engaged with the business. And while the number of customer transactions was down year over year in fiscal Q2, that 1.8% decline was smaller than the 4.8% decline in Q1.
Income investors can patiently hold this stock and collect its well-supported dividend in cash through any industry slowdown. Better yet, they can choose to automatically reinvest those payouts to accumulate more shares at depressed prices, laying the groundwork for better returns once the inevitable rebound arrives.
