As the markets hit new highs to start the year, some investors might be looking to grow their passive income from their investments. When finding the right dividend stocks to buy, investors can usually not go wrong sticking with industry-leading companies that have been around for years.
That said, let's look at why three Motley Fool contributors believe Coca-Cola (KO), Home Depot (HD 0.94%), and Realty Income (O -0.17%) are great income stocks to buy right now.
An outstanding record of dividend growth
John Ballard (Coca-Cola): Successful dividend investing is all about looking for a track record of sustainability. Coca-Cola has been around since 1886, and it has increased the quarterly dividend for 63 consecutive years. The stock currently offers a yield of 3.17%, higher than the consumer-staples average of 1.89%.
Coke benefits from a large portfolio of brands spanning carbonated beverages, juices, and tea. The power of these brands translates to massive sales volumes every year, where over 2.2 billion servings of its beverage products are consumed globally every year. That makes it an ideal dividend stock to boost the average yield of your investment portfolio.
Investors can expect the dividend to keep growing. With several international markets still in the developing stages of spreading more soft-drink consumption, Coke's unit sales volume probably has a long runway of growth ahead. That's one reason management believes it can achieve 4% to 6% top-line growth and 7% to 9% earnings growth on an annualized basis.
The shares are fairly valued at a forward price-to-earnings ratio of 21.7. When we combine the stock's 3%-plus yield on top of high-single-digit earnings growth potential, investors can expect to earn a low double-digit annualized return on their investment over the long term.
Don't be fooled by the slowdown
Jeremy Bowman (Home Depot): Home Depot has dominated the home-improvement retail industry for a generation, and it shows little sign of giving up its leadership.
Demand for Home Depot's products, including raw materials such as lumber, power tools, gardening supplies, appliances, and fixtures, isn't going anywhere, and much of its business is Amazon-proof, with high barriers to entry.
The company should also benefit in the coming years from a shortage of housing, as some economists estimate that the U.S. needs an additional 4 million homes to reach market equilibrium and satisfy demand. The company estimates its addressable home improvement retail market to be worth $950 billion.
Recent results at Home Depot haven't been encouraging, since the housing market has been cyclically weak. The company just wrapped up a year in which comparable sales were down 3.2% and revenue fell 3%. That weighed on the bottom line, as earnings per share were down 9.5% to $15.11.
CEO Ted Decker described 2023 as a year of moderation, and management expects similar headwinds in 2024, calling for revenue growth of just 1%, which includes the benefit of a 53rd week, and a 1% increase in EPS.
However, Home Depot should return to steady growth once interest rates fall and the housing market strengthens. The company also remains a dividend stalwart. It just declared its 148th consecutive quarterly dividend, a streak dating to the early days of the business. It currently offers a 2.3% dividend yield and has a history of strong dividend increases, typically in the double-digit percentages.
If you're looking for a dividend stock to count in retirement, Home Depot looks like a great choice, with its resilient business model and history of dividend hikes, and now looks like a good buying opportunity, with the stock in a cyclical downturn.
Get a reliable monthly check with this standout REIT
Jennifer Saibil (Realty Income): Every retirement account should have some real estate investment trust (REIT) stocks, and Realty Income stands out as one of the best. It has everything a dividend investor should be looking for: a high yield, a proven track record of dividend increases, and reliability. It also has something most other dividend stock can't boast: It pays monthly.
REITs are a class of stocks that own properties, typically of a specific type. They pay out 90% of their income as dividends, which is why they're great for passive income. Realty Income is a retail REIT, and it leases space to large chain retailers such as Walmart (NYSE: WMT) and Lowe's (NYSE: LOW). It's made two large acquisitions over the past two years and made several sale-leaseback deals that have added thousands of new properties to its total, and it has expanded into new areas such as gaming, with a sale-leaseback arrangement with Wynn Resorts (NASDAQ: WYNN).
It's highly diversified, with 1,326 tenants in 86 industries. However, 81% are in retail. Its largest industries and tenants are resilient businesses, and it consistently reports occupancy rates near 100%.
Realty Income stock is down 21% over the past year because of the suppressed real estate market. But Realty Income is well capitalized to buy more properties, and it reported adjusted funds from operations of $4 in 2023, up from $3.92 the year before. It's managing well through the real estate turbulence and is well positioned to keep it up for the foreseeable future.
At this price, Realty Income's dividend yields 5.6%. It has paid a dividend for 644 months consecutively -- that's more than 53 years -- with 105 quarterly increases. It's adding properties and income and sees a large opportunity ahead, and it's a top pick for reliable passive income.
