2 Dividend Stocks That Will Pay You for Life

Dividend stocks can provide investors stability with consistent payouts to shareholders and historically less volatile share prices.

Better yet, a recent study from Hartford Funds showed that over the past 50 years, companies that grew or initiated dividends have experienced the highest returns among the S&P 500, with 10.24% average annual returns. In contrast, non-dividend payers yielded an average annual return of 3.95%, while those reducing or eliminating their dividends resulted in a negative return of -0.6%.

With that in mind, let’s look at Caterpillar and Home Depot, two stocks that have long histories of paying and increasing their dividends, to see whether they might be timely additions to your portfolio.

Caterpillar prioritizes returning capital to shareholders

Caterpillar (CAT -0.28%), the world’s largest manufacturer of construction equipment, has raised its dividend for 30 consecutive years, and has paid a quarterly dividend for the past 90 years. Its current quarterly dividend is $1.30 per share, representing an annual dividend yield of 1.8%.

When evaluating any dividend stock, a key metric to look at is the payout ratio (annual dividends divided by annual earnings), indicating the company’s capacity to sustain dividend payments. According to the Hartford study, a payout ratio at or above 74% historically poses a challenge for a company in the event of a decline in earnings. With a payout ratio of 28%, Caterpillar is highly likely to continue raising its dividend each year for the foreseeable future.

In addition to its dividend, Caterpillar returns capital through share repurchases, which boosts the ownership stake for existing shareholders. Over the past five years, the company has reduced its share count by nearly 11%.

Put it all together, and Caterpillar returned $4.1 billion to shareholders in the first three quarters of 2023. Moreover, management recently reaffirmed its commitment to returning “substantially all” of the free cash flow generated from non-financial products to shareholders through dividends and share repurchases over time.

One area to watch is the global demand for construction products since interest rates remain elevated. There are signs this could be a source of trouble as the manufacturer’s order backlogs dipped from $30.7 billion in Q2 2023 to $28.1 billion in Q3 2023. Furthermore, during the latest earnings call management highlighted an anticipated ongoing weakness in China and Europe.

Despite the potential softening of demand, Caterpillar’s top and bottom lines are at all-time highs, with its trailing 12-month revenue and net income topping $66.6 billion and $9.1 billion, respectively. Better yet, the stock seems undervalued, currently trading at a price-to-earnings (P/E) ratio of 17, a discount when compared to its five-year average of 18.9.

CAT Revenue (TTM) Chart

CAT Revenue (TTM) data by YCharts

Home Depot pays a higher-than-average dividend yield

Given the slowing housing market amid elevated interest rates, you may be surprised to learn that Home Depot (HD 0.05%) stock generated a 14% total return over the past year despite slowing sales and profits. The world’s largest home improvement retailer is a long-time dividend payer, paying a quarterly dividend for nearly 37 consecutive years.

Most recently, Home Depot paid a quarterly dividend of $2.09 per share, equating to a 2.4% annual yield. Considering its payout ratio of 52% and its history of announcing a dividend raise each February, investors can reasonably expect another dividend raise soon.

Similar to Caterpillar, Home Depot repurchases its stock shares hand over fist, with management reducing its shares outstanding by 7.6% over the past three years. Through the first three quarters of its fiscal 2023, management allocated $6.5 billion to share buybacks. Home Depot CFO Richard McPhail summed up the company’s capital allocation strategy on the company’s most recent quarterly earnings call: “We invest in the business first. We pay our dividend. And then, as we determine excess cash, we flow that to our shareholders in the form of repurchases.”

Still, as alluded to, there is concern that a prolonged challenged macro environment could stunt Home Depot’s growth. Management guidance for the company’s fiscal 2023 includes sales decreasing by 3% to 4% and diluted earnings per share falling by 9% to 11% compared to fiscal 2022. Home Depot remains optimistic around its business while it waits out the “period of moderation” for the consumer, with president and CEO Ted Decker noting, “[We] couldn’t feel better about the business in our operations overall.”

With operations running smoothly, according to management, Home Depot should be well-positioned to restart its growth once consumer sentiment rebounds. Considering the Federal Reserve previously hinted at plans to cut interest rates in 2024 by a median estimate of three-quarters of a percentage point to a range of 4.5% to 4.75%, the housing market and consumer spending could reverse sooner than later. Additionally, according to a recent analysis by Realtor.com, the U.S. has been underbuilt by approximately 2.3 million housing units since the Great Recession, which favors Home Depot’s long-term trajectory.

Are these longtime dividend-paying stocks worth buying?

When it comes to companies having an unwavering commitment to returning capital to their shareholders, Caterpillar and Home Depot might be on the proverbial Mount Rushmore. Both companies can continue to weather elevated interest rates and the resulting softening consumer demand, given their positions as market leaders in their respective industries. Moreover, Caterpillar and Home Depot are well-positioned to capitalize on the constant need for infrastructure and housing, all while paying shareholders a growing dividend, making both stocks worthy of any income-seeking portfolio.

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