If you're on the hunt for profitable, well-established businesses to put in your dividend portfolio, Home Depot (HD 0.94%) and Coca-Cola (KO) both deserve a closer look. These giants dominate their respective industries and generate ample cash flow. Their management teams prioritize returning that cash to shareholders through a steadily rising dividend payment that's well covered by earnings.
Their businesses have different characteristics that might make one a better fit than the other for your portfolio. Let's take a closer look at which is the better stock to buy right now.
Coke's bubbling operations
Coke's latest results show off several of its major competitive strengths. Beverages are a consumer staple niche, and that factor has helped sales rise even as shoppers pulled back on other spending areas in recent months. Coke's organic revenue was up 11% year over year last quarter, beating management's expectations.
Home Depot competes in a more discretionary industry, as evidenced by management's forecast of a roughly 4% comparable-store sales drop in fiscal 2023. Do-it-yourself projects have been downsized compared to 2022, and shoppers aren't spending as much on big-ticket items like appliances. Sales are down 3% over the first three quarters of 2023. Most Wall Street pros expect the chain to boost revenue by less than 2% next year, trailing Coke's results.
Home Depot's earnings prospects
Coke has more pricing power in this environment, and you can see proof of that fact in its rising prices and in Coke's market-leading 30% operating profit margin. Home Depot is faring better than its main rival Lowe's in the profitability department, but it is still struggling with flat average spending per visit and declining customer traffic.
Ironically, Home Depot seems better positioned for improving earnings over the medium term. A lot of its pricing challenges stem from deflation in lumber prices, which won't last forever. And the chain is doing a stellar job at generating cash, having recently set a new annual record.
HD Free Cash Flow data by YCharts
These metrics imply that Home Depot will enjoy a sharp earnings rebound once conditions stabilize in the home improvement market. Coca-Cola, in contrast, is likely to post consistently positive, but often weaker, profit trends.
The dividend and price
Two other factors count in Coke's favor. Its shares come with a meatier yield today, and the company has a much longer track record of consecutive annual payout hikes. Coke has boosted its dividend for more than 60 straight years, while Home Depot had to pause its increase during the worst of the Great Recession. That suspension put the chain behind rival Lowe's, which has kept its payout steadily rising for just over 50 years.
Ultimately, most income investors will prefer Coca-Cola stock for its more predictable sales, steadier earnings, and longer dividend-track record. If you prefer long-term growth and don't mind taking on higher risk, then Home Depot is a fine choice. But Coke has proven its ability to provide solid shareholder returns through just about every type of selling environment. That's an asset for any business, but it is especially valuable for the best dividend stocks in your income portfolio.
