Income investors have a small but powerful advantage over growth stock investors. While both investment types can take advantage of lower prices during a stock market decline, dividend investors also benefit from the rising yields that come with a falling stock market.
Not every dividend stock can maintain its payout when economic conditions worsen, of course. That's why it makes sense to stuff your portfolio with high-quality businesses that have long track records of steadily boosting their dividends. Let's take a closer look at two such businesses, Home Depot (HD 0.94%) and Procter & Gamble (PG -0.78%). They both have some excellent qualities as long-term investments. But which is the better fit for your portfolio?
Growth trends
The two consumer-facing businesses are both suffering from weaker demand as consumer spending patterns shift. But this is where Procter & Gamble's focus on selling essential products really pays off. Since consumers don't readily abandon their favorite brands in niches like laundry care and home cleaning supplies, P&G's organic sales trends have held up well in recent months. The metric was up 8% last quarter compared to Home Depot's 2% decline.
There are several big pressures on the home improvement chain's business today, including the fact that professional contractors are delaying big projects. High mortgage rates are soaking up more of people's remodeling and upgrade budgets as well. These issues have contributed to a 3% drop in customer traffic so far in 2023. Give the growth edge to P&G, then.
Profits and dividends
Both companies are leaders in their respective industries, and that positioning translates directly into unusually strong profit margins. Yet P&G stands out in this regard, too.
HD operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Its 22% operating profit margin is well ahead of peer Kimberly-Clark. It's also far above Home Depot's 15% rate. Still, Home Depot is leading its main competitor Lowe's in this key metric. Investors don't have to worry much about either business losing its earnings edge. But P&G is the less risky option here due to its higher margin and its focus on the consumer staples niche.
As for dividends, there are two factors tilting Home Depot's way. The retailer offers a higher yield today (2.9% compared to 2.6%), in part thanks to waning enthusiasm on Wall Street about its short-term growth prospects.
It also is more generous than most of its peers with its capital return program. Home Depot has spent aggressively on stock buybacks over the past decade and is committed to returning 55% of annual earnings as dividend payments as well. Lowe's, for context, aims for a 35% return.
Income investors who prize a longer track record might still prefer P&G because the company has an unbroken streak of nearly 70 years of annual raises. By contrast, Home Depot paused its increases during the Great Recession.
Price and value
Even the best business can be a poor investment if the price is too high. That risk is certainly present with both P&G and Home Depot because the stocks are valued at premiums compared to rivals. You would have to pay over 4 times annual sales for P&G, while Kimberly-Clark is priced at half that valuation. Home Depot shares cost 2 times revenue, while Lowe's would cost an investor just 1.3 times annual sales.
Your choice between the two might ultimately come down to your risk tolerance. Home Depot's lower valuation and higher yield should support better long-term returns, but the next few quarters will likely be volatile if the home improvement market stumbles.
P&G is among the least risky stocks you could consider, meanwhile, due to its massive global sales footprint, its recession-resistant business, and its multi-decade track record of dividend hikes. These positive factors are excellent reasons to like this dividend stock right now.
