Dividend stocks can get a bad reputation as boring investments with the companies behind them on the downslope of the business cycle. But the numbers say boring is a winning investing strategy.
Specifically, going back to 1960, 69% of the total return of the S&P 500's roughly 40,000% increase can be attributed to reinvested dividends compounding, according to research by Hartford Funds.
Considering that, let's examine a few leading dividend-paying stocks at or close to their 52-week highs to determine whether it's worth investors doubling up or waiting for a price decline.
1. Apple
Warren Buffett, considered one of the greatest investors of all time, has called Apple (AAPL -0.35%) a "better business than any other we own [outright]." The tech giant is the largest company in the world by market capitalization, worth an astronomical $3 trillion, and represents roughly half of Buffett's Berkshire Hathaway's $370 billion stock portfolio.
While Apple's quarterly dividend of $0.24 per share may not initially impress dividend investors with its modest annual dividend yield of 0.5%, there is more to this stock than meets the eye. Over the last decade, Apple consistently demonstrated its commitment to shareholders by paying a dividend and increasing it at an average annual rate of roughly 9%. This track record suggests a promising outlook for continued annual dividend growth for the foreseeable future.
Next, Apple is unmatched regarding the sheer amount of money it uses to repurchase shares. Over the company's past three fiscal years, management spent an astonishing $253 billion buying back its shares. As a result, the company has lowered its outstanding shares by 7.6%, which enriches existing shareholders' ownership stake without them having to buy more shares. Looking ahead, Apple has roughly $76 billion left on its current share repurchase program that management can use to continue to return capital to shareholders.
For Apple's bear case, investors are wise to question how much bigger an unprecedented $3 trillion company can get, especially one that is trading near an all-time high. Apple has defied the odds thus far, with analysts similarly asking that question when the company hit a $1 trillion and $2 trillion market capitalization. But as long as Apple continues returning an exorbitant amount of capital to shareholders, it may not matter.
2. Costco Wholesale
The membership-only retailer Costco Wholesale (COST 1.01%) is a favorite among price-conscious people looking for discounted prices on a wide range of products. The stock has had a banner year in 2023, up roughly 46%, and recently touched an all-time high.
The company is a longtime dividend payer, with management raising it annually since 2004. Today, the stock pays a quarterly dividend of $1.02 per share, equating to an annual dividend yield of 0.6%.
Beyond its quarterly dividend, Costco is known for paying a special cash dividend roughly every three years and is about to pay another one. The company recently announced a special cash dividend of $15 per share to be paid on Jan. 12, 2024. With an ex-dividend date of Dec. 27, prospective investors must purchase the stock by Dec. 26 to receive the special cash dividend.
Costco can pay its intermittent special cash dividend because of its immaculate balance sheet. Specifically, the wholesaler ended its fiscal 2023 fourth quarter with nearly $11 billion in net cash (cash and cash equivalents minus total debt). In comparison, competitors Target and Walmart have net debt of $14 billion and $38 billion, respectively. Despite the fact that the special cash dividend will negatively affect the balance sheet by roughly $6.6 billion, Costco will not face its competitors' challenge of servicing high-interest-rate loans.
As Costco stock ascended in 2023, so has its forward price-to-earnings (P/E) ratio, a valuation metric that measures a company's stock price against expected earnings over the next 12 months. Today, Costco trades at 42 times forward earnings, which is significantly higher than Target and Walmart at 16 and 24 times forward earnings, respectively.
COST PE Ratio (Forward) data by YCharts
3. Home Depot
Home Depot (HD 0.94%) pays the highest dividend yield on this list at 2.4%, with its quarterly dividend of $2.09 per share. The largest home improvement retailer by market capitalization has paid a dividend for 36 consecutive years and raised it each of the last 14 years. The company most recently paid its fourth quarterly dividend of $2.09, meaning investors can reasonably expect management to increase it again soon.
Like Apple, Home Depot also returns capital to shareholders through share repurchases, lowering its outstanding shares by 7.6% over the past three years.
Home Depot's revenue is down 3% through the first three quarters of its fiscal 2023, which management blamed on people shifting away from goods and services amid a higher-interest-rate environment. Furthermore, Home Depot may struggle to grow its revenue in the near term, as inflation is possibly plateauing and interest rates remain elevated.
The good news is that the Federal Reserve indicated plans to cut interest rates in 2024 by a median estimate of three-quarters of a percentage point to a range of 4.5% to 4.75%. With a recent rally of Home Depot stock to a 52-week high of $354 per share, the market believes the rate cuts could drive consumer demand, especially when experts believe America has been underbuilt by roughly 2.3 million housing units since the Great Recession.
Are these dividend stocks worth doubling down?
No matter how you slice it, these three stocks are trading at elevated valuations. But there are reasons for those premiums, including past performance, dominance in their respective industries, and management's unwavering commitment to returning capital to its shareholders.
Therefore, investors worried about valuations should consider dollar-cost averaging into these three stocks because they are well-positioned to continue rewarding long-term shareholders.
