Dividend stocks can deliver a great combination of long-term gains and short-term safety. Amid bull markets, they will rise with the rest of the equity market even if they don't keep up with their higher-growth counterparts, and even during corrections, they generally continue to generate some returns via their dividends.
The two dividend stocks below are worthy of consideration, whether you're looking for long-term appreciation or immediate income.
Sysco
Sysco (SYY) is the biggest player in the U.S. foodservice distribution market, with a market share of roughly 17%. It provides food and related products to restaurants, hospitals, schools, hotels, and similar facilities. You've probably seen its trucks on the roads or making deliveries to any number of places that serve food and beverages.
Sysco doesn't have a high-growth business model, but it occupies an important part of the supply chain for an industry that's not going away anytime soon. Cyclicality is an issue from time to time, but long-term demand is still impressively stable for these services. As long as Sysco can maintain its competitive position, it should be in a position to generate reliable cash flows.
There's some debate about the size of Sysco's economic moat. Its offering is difficult to differentiate from those of its peers, and there's not a ton of room for innovation in the food distribution business. There's not much to gain from intellectual property or any sort of network effect.
However, the company's unrivaled scale provides cost savings that it can pass along to customers. This makes it difficult for other distributors to compete with it on a price basis, which creates a sustainable advantage for Sysco. That scale also theoretically allows Sysco to have more diversified sources and deeper relationships with producers, which can be attractive for customers who don't want to deal with uncertainty when it comes to product availability.
Sysco experienced significant disruption during the pandemic, when many of its customers suspended operations or closed their doors permanently. It has rebounded nicely from that downturn, reverting to an overall slow and steady trend higher. Resilience and stability are among the most important features that a dividend stock can boast.
SYY Revenue (TTM) data by YCharts.
Sysco is a Dividend King, and investors may have been more focused on growth stocks when the appetite for risk was high. However, sentiment flipped late last year, with buyers driving Sysco's stock price higher and its dividend yield lower.
The stock now pays a 2.5% yield, which is still respectable. Its payout ratio is around 50%, which should make shareholders feel confident in its ability to responsibly grow dividends for years to come.
Home Depot
Home Depot (HD 0.94%) is the leading home-improvement retailer in the U.S., with more than 2,300 stores throughout North America. The company's sales are split fairly evenly among building materials, decor, and hardlines, which includes tools, hardware, and garden goods. Sales to professionals and contractors represent roughly half of the total, with consumer sales making up the rest.
It's clear that Home Depot's well-being is closely tied to conditions in the housing market and consumer sentiment. Demand for its products is driven by new construction, people personalizing newly purchased homes, and various high-ticket home-improvement projects. There's a fairly reliable demand base from normal maintenance activities, but everything else is subject to economic cycles.
Home Depot has notably struggled due to high inflation, rising interest rates, and economic uncertainty over the past two years. New housing starts and existing home sales have been relatively low. Consumers have been hesitant to spend on big-ticket items. The current challenges are undeniable, but the overall trend is encouraging if you zoom out and look at the long-term view.
SYY Dividend Yield data by YCharts.
For investors who can tolerate its cyclicality, Home Depot's long-term catalysts are strong. Homeownership rates in the U.S. are among their lowest levels in decades. Low interest rates helped to drive home prices much higher during the COVID-19 pandemic.
But the combination of higher borrowing costs and a relatively low supply of homes for sale has kept many people priced out of the market since then. The number of households formed is multiple millions higher than the number of homes built over the past 15 years, so many analysts expect an inevitable surge in activity in homebuying and homebuilding.
Even with more difficult economic conditions, Home Depot's payout ratio is still around 50%, so it's not straining to return cash to shareholders. The stock's 2.3% dividend yield provides a respectable base rate of return with an opportunity for appreciation on the back of a long-term housing recovery.
