Buying shares of great businesses that pay dividends to shareholders can lead to substantial dividend income down the road. A lower share price means you get a higher dividend yield. This means more dividend income to enable buying more shares of your favorite stocks. The snowball effect of earning more dividend income and rolling that into buying more shares can add up tremendously over decades.
If you're looking for dividend stocks that can deliver growing income over the long term, three Motley Fool contributors believe Starbucks (SBUX 0.47%), Home Depot (HD 0.94%), and Realty Income (O -0.17%) are timely buys right now.
Morning coffee routines create a dividend factory
John Ballard (Starbucks): Starbucks stock is currently trading 26% off its all-time high from a few years ago. This is a good opportunity to consider adding shares to your portfolio since the ubiquitous coffee chain continues to post consistent double-digit growth and pays a great yield after its recent pullback.
Starbucks has been paying a quarterly dividend to shareholders for over 13 years, with the current dividend yield at an above-average 2.49%. But buying a stock that pays a good yield is not enough. Long-term investors also need to see strength in the business itself. A company can only sustain its dividend payout if it is growing revenue and profits.
Comparable-store sales, which measures the change in sales at existing stores open at least a year, increased a solid 8% year over year in the fiscal quarter ended Oct 1. That is impressive for a company with over 37,000 stores worldwide. Starbucks is benefiting from a powerful brand that attracts repeat business.
Moreover, it continues to find room to keep growing. It opened 816 new stores last quarter. It is accomplishing this while keeping control of operating expenses to deliver double-digit growth in earnings per share.
Starbucks typically pays out over half of its earnings in dividends. Management's focus on improving operating efficiency, expanding margins, and opening new stores should support dividend growth for a long time.
This retailer will bounce back
Jeremy Bowman (Home Depot): The slowdown in the housing market has hit a wide range of stocks, including real estate companies, brokerages, and home improvement retailers like Home Depot.
Mortgage rates have spiked to nearly 8%, which means fewer Americans are buying houses, leading to fewer purchases of appliances or bathroom tiles from stores like Home Depot. As a result, shares of the leading home improvement retailer are down 32% from their peak in late 2021.
Despite weakness in the stock, the business still looks as strong as ever. Home Depot essentially operates in a duopoly with Lowe's and in an industry that enjoys high barriers to entry. Plus, necessities like building materials aren't about to disappear.
When a stock like Home Depot sells off, it's a good idea to take advantage of the discount. In fact, even the retailer seems to be doing that, announcing a $15 billion share repurchase authorization in August. Its dividend also looks appealing right now as its yield has risen to 2.9%, and the retailer has a long track record of raising its quarterly payout.
In addition to the prospects of a recovery in the housing market, there's another reason to be bullish on Home Depot in the medium term. There's an estimated shortage of 4 million homes in the U.S., and rectifying that imbalance is going to create demand for suppliers like the big-box chain, which has direct relationships with contractors in addition to selling to homeowners.
The housing market may be unpredictable, but you can bet that Home Depot stock will bounce back once the real estate market strengthens.
Monthly dividends add up
Jennifer Saibil (Realty Income): Realty Income is a real estate investment trust (REIT), and most individual investors would benefit from having REITs in their portfolios. They usually pay high-yielding dividends, and many are stable and reliable forms of passive income.
Realty Income stands out from other REITs for several reasons, making it a compelling dividend stock to own. The first is that it is one of very few stocks that pays a monthly dividend, in contrast with most dividend companies paying a quarterly dividend. Although you'd have to own a lot of shares to benefit from this feature, for someone relying on passive income for discretionary spending, it could be a significant advantage.
But it's also one of the largest REITs in the world, with more than 13,000 properties after it merged with another REIT last year. Its tenants run the gamut of retailers, providing solid diversification, but its top tenants are mostly essential businesses that have a low risk of not being able to pay their rents.
It leases properties to more than 1,300 tenants, and its two biggest are Dollar General and Walgreens. Other large clients include Lowe's, FedEx, and Walmart. Portfolio occupancy is currently at 99%, and it's typically there or not too far off.
There are two approaches to dividends. One is to use them as passive income. The other is to reinvest them if you don't need the passive income right now, generating more shares and increasing the base dividend yield over time. Either way can be very lucrative for shareholders, depending on your individual needs.
Realty Income stock is down 25% this year, and its dividend yields a whopping 6.3% at the current price, way higher than usual. It's been declining because, as a property-owning and buying landlord, it's impacted by rising interest rates and a real estate bust. But the real estate industry took a further hit this week when a Federal court found that realtors were guilty of artificially inflating fees. Many real estate-related company stocks fell on the news.
Most of the content of that lawsuit doesn't directly impact Realty Income, and rising interest rates haven't dented occupancy rates. Realty Income hasn't missed a dividend payment in 639 months, and it has raised the dividend for 104 consecutive quarters. This is an excellent opportunity for smart investors to grab shares at a low price and a higher-than-average dividend yield.
