Dividends are a form of passive income that can be overlooked as a component of returns in the stock market. There are certainly growth stocks that don’t pay dividends that can deliver great returns for decades to come, but when markets get volatile it pays — literally — to own growth companies that pay out some cash to shareholders.
Three Motley Fool contributors were recently selected home depot (NYSE:HD), eBay (NASDAQ:EBAY)and Levi Strauss (NYSE: LEVI) as great dividend stocks to consider now. Investing $5,000 in each share would yield a total profit of $300 over the next year, based on each company’s most recent quarterly dividend payment. Therefore, these companies are good investments.
Super reliable and high yielding, same great dividend stock
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 as it invested in growth through its digital channels. But efforts to keep shareholders happy in the short term shouldn’t come at the expense of long-term growth, and top companies know this. In order to increase long-term value, there are sometimes short-term pressures. The market is volatile in the short term, with daily up and down ticks. To be successful in the stock market, investors need to filter out the noise and focus on long-term goals.
That leads to Home Depot’s 2022 performance so far, which, as you might have guessed, hasn’t been the best. The stock is down 25% this year. At current prices, shares are trading at less than 20 times trailing 12-month earnings. That would be meaningless if there wasn’t much future. But Home Depot didn’t become the world’s largest hardware store with a mediocre strategy and a mediocre team. It’s a top company with robust growth catalysts, which means stocks are worth a lot if you can buy them on a dip. Not to mention that the dividend yield is 2.45% at this price.
Part of the reason for the dismal performance so far this year can be attributed to the company’s past success. It has seen high growth during the pandemic as people stayed home and focused on home improvement. Home Depot’s aforementioned investments in digital growth helped, and it was poised to handle the surge in demand. Now it faces stiff competition from last year as well as people’s spending in other areas. But that will eventually even out, and Home Depot has several catalysts for growth in the near term. These include a hot housing market, meaning buyers are spending on home improvements, as well as the shift to working from home.
Management expects sales growth to be “slightly positive” in 2022, which accounts for some of the inventory decline. But investors can rest assured of Home Depot’s long-term growth prospects, and in the meantime (and after) shareholders can look forward to safe passive income from dividends.
eBay only recently started paying a dividend, but the payment has excellent potential
Parkev Tatevosian (eBay): Investors looking to generate passive income have an excellent opportunity on eBay. The e-commerce and auction site has grown earnings per share at a healthy pace as sales have grown at double-digit rates for two consecutive years. It can be volatile in the near term as economies reopen and consumers change their spending habits. In the longer term, however, eBay will benefit from an increasing share of spending on online moves.
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 use a growing portion of those earnings for dividends. Remember that dividends are paid out of profits. Therefore, eBay’s robust earnings growth over time can support a steadily growing dividend payment. The company only started paying a dividend in 2019, growing from $0.56 per share to $0.72 in 2021.
Speaking of dividend payout ratio, a metric that measures the percentage of profit a company pays in dividends, eBay had a ratio of just 3.42%. That means it has plenty of room to grow its dividend without diving into savings or borrowing to support payments.
With a price-to-earnings ratio of 2.7 and a price-to-free cash flow multiple of 16.4, eBay is far from expensive. The cheap valuation combined with solid earnings growth and a low dividend payout ratio are great reasons why income investors can buy eBay stock.
Levi’s enjoys high demand for denim
John Ballard (Levi Strauss): If you’re looking for an underrated reopening game look no further than the classic denim brand. Levi’s long heritage dates back to the 19th century gold rush. That means Levi’s has seen its fair share of economic booms and busts, inflation, wars, and ongoing struggles with rivals. Despite the recent surge in inflation and tight supply chains, Levi’s just had another strong quarter of sales and earnings growth, and the stock offers an attractive 2% dividend yield.
Revenue rose 22% year over year in the fiscal first quarter that ended in February. Most impressive were the improved margins, which pushed net income up 37% from the year-ago quarter.
Improving business performance bodes well for potential quarterly dividend increases. The Company announced a dividend payment of $0.10 per share to stockholders, payable on or after May 24th to stockholders of record as of the close of business on May 6th. That’s an annual payout of $0.40, so investing $5,000 in the stock translates to $100 in annual income.
Levi’s has paid a dividend every year since 2008. It also only pays out 21% of earnings in dividends, so there’s room to grow the dividend simply by increasing the payout ratio.
In addition to an attractive dividend yield, the stock is cheap, trading at a price-to-earnings ratio of 12.6 based on analyst consensus estimates for fiscal 2022 (ending November). Rising demand for denim could lead to market-beating returns for investors at this level.
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Jennifer Saibil has no position in any of the stocks mentioned. John Ballard has no position in any of the stocks mentioned. Parkev Tatevosian owns eBay. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends eBay and recommends the following options: Short-term April 2022 $62.50 views 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.