Dividends are a form of passive income that can be overlooked as a component of stock market returns. There are certainly growth stocks that don’t pay dividends that can deliver great returns over decades, but when markets get volatile, it pays – literally – to own growth companies that distribute dividends. money to their shareholders.
Three Motley Fool contributors were recently selected Home deposit (NYSE:HD), eBay (NASDAQ:EBAY)and Levi Strauss (NYSE:LEVI) as excellent dividend-paying stocks to consider right now. If you invested $5,000 in each stock, it would yield a total income of $300 over the next year based on each company’s current quarterly dividend payment. Here’s why these companies are good investments.
Super reliable and high yield equals a great dividend
Jennifer Saibil (Home Depot): Even the best stocks have their worst moments. Home improvement giant Home Depot experienced this in 2019 when sales and profitability suffered by investing in growth through its digital channels. But efforts to please shareholders in the short term should not come at the expense of long-term growth, and great companies know this. To generate long-term value, there is sometimes short-term pressure. The market is volatile in the short term, with daily ups and downs. To succeed in the stock market, investors need to filter out the noise and focus on long-term goals.
This leads to Home Depot’s performance so far in 2022, which, as you might have guessed, hasn’t been the best. Its stock is down 25% this year. At the current price, the shares are trading at less than 20 times the earnings of the last 12 months. It wouldn’t make sense if there wasn’t a lot of future. But Home Depot didn’t become the world’s largest home improvement retailer with a weak strategy and team. It’s a top company with robust growth catalysts, which means stocks are a bargain when you can buy them on the downside. Not to mention that at this price, its dividend yields 2.45%.
Part of the reason for this year’s poor performance so far stems from the company’s past success. It saw strong growth throughout the pandemic when people stayed and focused on home improvements. Home Depot’s aforementioned investments in digital growth saw it through, and it was ready to meet the increased demand. Now he’s dealing with tough lineups from the past year as well as outlays from people in other areas. But that will balance out eventually, and Home Depot has several near-term growth catalysts. These include a boiling housing market, which means buyers will have to spend on home improvements, as well as the shift to working from home.
Management expects sales growth to be “mildly positive” in 2022, which explains some of the decline in inventory. But investors can be confident in Home Depot’s long-term growth prospects, and in the meantime (and after), shareholders can enjoy secure passive income from dividends.
eBay only recently started paying out a dividend, but the payout has great potential
Parkev Tatevosyan (eBay): Investors looking to generate passive income have a great opportunity with eBay. The e-commerce and auction site has grown its earnings per share at a healthy pace, with revenue growing in double digits for two consecutive years. The short term could be volatile as economies reopen and consumers change their spending habits. But in the long term, eBay will benefit from a growing share of online spending.
eBay has grown earnings per share at a compound annual rate of 23.6% over the past decade. If it can sustain anywhere near that level of earnings growth, it can allocate an increasing share of those earnings to dividends. Remember that dividends are paid out of profits. Therefore, eBay’s robust earnings growth can support a steadily growing dividend payout over time. The company only started paying a dividend in 2019 and it fell from $0.56 per share to $0.72 in 2021.
Speaking of its dividend payout ratio, a metric that measures the percentage of profits a company pays out in dividends, eBay had a rate of just 3.42%. This means it has plenty of room to grow its dividend without dipping into savings or borrowing to support the payment.
Trading at a price/earnings ratio of 2.7 and a price/free cash flow multiple of 16.4, eBay is far from expensive. The inexpensive valuation combined with solid earnings growth and a low dividend payout ratio are great reasons why income-seeking investors should buy eBay stock.
Levi’s benefits from strong demand for denim
John Ballard (Levi Strauss): If you’re looking for an underpriced reopening game, look no further than the classic jeans brand. Levi’s long legacy dates back to the Gold Rush in the 19th century. That means Levi’s has had its fair share of economic booms and busts, inflation, and ongoing wars and battles with competitors. Despite the recent spike in inflation and tight supply chains, Levi’s just posted another solid quarter of revenue and bottom line growth, and the stock offers an attractive 2% dividend yield.
Revenue rose 22% year over year in the first fiscal quarter, which ended in February. Most impressive was improved margins which drove net income up 37% from the prior year quarter.
Improving corporate performance bodes well for potential quarterly dividend increases. The company has declared a dividend payment of $0.10 per share to shareholders, which is payable on or after May 24 to shareholders of record at the close of business on May 6. This is an annual payment of $0.40, so an investment of $5,000 in the stock would result in an annual income of $100.
Levi’s has paid a dividend every year since 2008. It also pays only 21% of earnings in dividends, so it’s possible to increase the dividend simply by increasing the payout ratio.
In addition to an attractive dividend yield, the stock is cheap, trading at a price-earnings ratio of 12.6 based on analysts’ consensus estimate for fiscal year 2022 (which ends November ). Rising demand for denim could result in above-market returns for investors from these levels.
10 stocks we like better than Home Depot
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Jennifer Saibil has no position in the stocks mentioned. John Ballard has no position in the stocks mentioned. Parkev Tatevosian owns eBay. The Motley Fool owns and recommends Home Depot. The Motley Fool recommends eBay and recommends the following options: Short Calls April 2022 at $62.50 on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.