A company's ability to provide passive income for a lifetime is based on earnings growth, not what the dividend is today.
A common mistake investors will make is focusing too much on the current yield of a stock, which could fall if the stock price has done well, even if dividend raises have been consistent.
Here's why these three fool.com contributors think The Home Depot (HD -0.30%), York Water Company (YORW -1.35%), and Walmart (WMT 0.48%) are three quality dividend stocks that have a multi-decade runway for steady growth.
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Is it a great time to buy Home Depot stock?
Lee Samaha (The Home Depot): If you believe the current interest rate cycle will eventually turn, then you likely believe the housing market will improve, and if that's the case, then Home Depot is likely to return to growth. As previously discussed, Home Depot's comparable-store sales growth has declined for the last six quarters.
There are no prizes for guessing why. Relatively high interest rates make mortgage payments more expensive, thus slowing the housing market. As homeowners tend to repair and remodel properties before and after sales or use financing to fund these projects, a slowdown in home sales will hit Home Depot.
As the chart below shows, higher rates reduce housing affordability (a lower number means housing is relatively more expensive), and home sales follow. That said, the chart also shows how home sales improve when affordability does.
US existing home sales data by YCharts.
Meanwhile, Home Depot's current dividend is easily covered by its earnings and free cash flow per share.
HD free cash flow per share data by YCharts; TTM = trailing-12-months.
All told, Home Depot's dividend (current yield 2.6%) is sustainable and has growth prospects as the housing market improves.
Dip your toes in elite dividend stock York Water
Scott Levine (York Water): One of the earliest lessons that new investors learn is that while a stock performed in a given way previously, there's no certainty it will continue to do the same. This hardly means, however, that looking at a stock's previous performance is futile.
Take York Water, for example. The company's history extends back over two centuries to 1816, and it bills itself as the "first investor-owned utility." For these reasons and others, it certainly seems reasonable for investors with multi-decade investing horizons to consider wading into utility York Water and its 2.2% forward-yielding dividend.
Having raised its dividend for 27 consecutive years, York Water certainly warrants respect for increasing its payout to shareholders. This hardly places it among the Dividend Kings, which have hiked their payouts for at least 50 consecutive years.
But in terms of how long it has been paying its dividend, York Water is in a class all its own. The utility has paid a dividend every quarter for 208 consecutive years.
How did the company achieve such an impressive feat? As a utility that provides water and wastewater services, York has a simple and resilient business model. While economic downturns affect consumer spending in a variety of areas, it's highly unlikely that customers will choose to reduce their water consumption as a way to pinch pennies. Over the past 25 years, for example, the company has consistently grown earnings before interest, taxes, depreciation, and amortization (EBITDA) in line with revenue.
YORW revenue (annual) data by YCharts.
While the company reliably grows revenue and earnings, it's not sacrificing its financial health to please shareholders. Over the past 10 years, York Water has averaged a 61% payout ratio. It's a dividend stock that warrants serious attention from investors looking to build a more-robust passive income stream for the long term.
This Dividend King just hit an all-time high, but it's still a great value
Daniel Foelber (Walmart): If you're looking for a company that can give you a lifetime of passive income, a good place to start is with companies that have already provided around half a lifetime of consecutive annual dividend raises: Dividend Kings.
Dividend Kings have paid and raised their dividends annually for at least 50 years. Walmart, a newcomer to this group, recently raised its quarterly payout by 9%. It's a noticeably larger raise than in years past and is the largest in over a decade.
WMT dividend data by YCharts.
Earnings growth is fueling Walmart's dividend raise. The stock hit an all-time high on May 16 after reporting better-than-expected sales and earnings, including strong margins.
First-quarter fiscal 2025 adjusted operating income increased by 13.7%, and sales shot up 6% compared to the same period last fiscal year. When a company grows operating income faster than sales, it indicates margin expansion. And that means the company is either improving efficiency, using its pricing power, or finding some other way to be more effective at converting sales into income. Walmart is doing a bit of everything to drive higher margins.
It grew its e-commerce business by 21% in the latest quarter and reduced its net delivery cost per order by 40%. The company has been rapidly expanding its e-commerce business, including the launch of Walmart+ in 2020 and a new on-demand home delivery service, which was announced in March of this year.
Walmart yields just 1.4% because the stock price has been too successful for its own good and is growing faster than the dividend. But the company is unlocking some serious growth potential that could help accelerate earnings and, in turn, the dividend.
The stock is up nearly 22% year to date, and with a forward price-to-earnings ratio of 26.6, it isn't cheap by any means. However, Walmart has the makings to provide a lifetime of passive income and grow the value of the business as well.
