Up 160% during the last five years, Home Depot's (NYSE:HD) dividend is one of the fastest-growing payouts in the Dow Jones Industrial Average. Management raised it by 26% this year -- on top of a 21% boost in 2014. Compare that recent history to income-stock stalwarts like Procter & Gamble and McDonald's, whose growth rates have been in the single digits the past few years: 

HD Dividend Chart

HD Dividend data by YCharts.

However, P&G's and McDonald's dividends have something that Home Depot's doesn't: an unbroken streak of annual payout hikes. Home Depot had to forego dividend hikes for three years during the worst of the financial crisis in 2007-2009.

But are income investors risking another dividend disappointment with this stock? Let's take a closer look.

Cash sources and uses
First, some context regarding cash. Home Depot's dividend is the smaller player in a massive capital return program. The retailer sent out just $5 billion of dividend checks during the past two years. By contrast, spending for stock buybacks was $15.5 billion.

The next few years should bring a more-even distribution between dividends and stock buybacks because management plans to spend $6 billion annually on share repurchases. The good news for investors is that the company is generating operating cash at an $8 billion pace, leaving enough room for growth in both cash-return channels.

HD Cash from Operations (Annual) Chart

HD Cash from Operations (Annual) data by YCharts.

Besides strong cash generation, Home Depot's modest expansion plans set it apart from many rival retailers. Management is happy with the size of the current 2,300 store base, planning to open just six new locations this year. That conservative approach means that there tends to be a lot of excess cash headed to shareholders -- so long as earnings keep climbing. 

Earnings drivers and outlook
Speaking of earnings, Home Depot's dividend looks quite safe as a percentage of operating profit. The payout ratio is comfortably below 50% of earnings, having only briefly spiked above that level during the housing crash years:

HD Payout Ratio (TTM) Chart

HD Payout Ratio (TTM) data by YCharts.

Because management has a stated goal of reaching a 50% payout ratio, investors can expect the dividend to climb at roughly the same pace as earnings, with an extra boost provided by a steadily shrinking outstanding share count. You can see that trend holding up well in the past few years:

  FY 2012 FY 2013 FY 2014
Earnings growth 22% 25% 25%
Dividend growth 34% 21% 26%

Source: Home Depot financial filings.

Looking ahead
Next year's dividend hike may not be much above 20% though. After all, Home Depot's per-share earnings are expected to rise by a relatively tame 14% through 2015. Sales growth at existing locations looks set to be a strong 4% for the year. And while that's better than most national retailers are seeing -- and higher than management's original forecast -- it's still below the breakneck pace of 5% comps growth last year, and 2013's 7% gain.

Yet as you can see from the payout ratio chart above, Home Depot has room to boost its dividend at a quicker pace than earnings while still remaining below the 50% target. Improving efficiency metrics also suggest that earnings quality is headed higher. For example, Home Depot's return on invested capital has surged to an industry-thumping 25%. Executives are confident that they can get ROIC up to 27% by the end of this year.

Whether this dividend keeps spiking higher ultimately depends on the health of the housing market and the U.S. economy. But at least for now, the payout is safely covered by cash flow and profits, and set to grow at a healthy double-digit pace next year.

Demitrios Kalogeropoulos owns shares of Home Depot and McDonald's. The Motley Fool recommends Home Depot and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.