We recently compiled a list of the 12 Most Reliable Dividend Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where The Home Depot, Inc. (NYSE:HD) stands against the other dividend stocks.
The year 2024 proved favorable for dividends, even though the Dividend Aristocrats Index lagged behind the broader market. Throughout the year, US companies consistently increased or upheld their dividend payouts. In addition, several major tech firms began offering dividends, signaling to investors that it’s possible for a company to focus on both growth and shareholder returns. By September 30, 2024, approximately 80% of the companies in the S&P index were distributing dividends, a figure that has remained fairly stable over the past decade. Notably, nearly 24% of these dividend-paying firms were in the technology sector, a significant increase from 13% ten years ago. Sectors such as healthcare and industrials also experienced notable growth in the number of companies offering dividends. This broader distribution of dividends has expanded the range of investment opportunities, giving equity-income investors more access to high-growth, dynamic, and innovative companies. Given these developments, analysts remain optimistic about their performance heading into 2025.
Also read: 10 Best Canadian Dividend Stocks to Buy For Income Investors
Analysts note that, from a broad perspective, earnings growth has traditionally been the primary driver of dividends. Last year saw strong earnings growth, and they anticipate an even better performance in 2025. Goldman predicts an 11% increase in earnings per share for this year, up from an estimated 8% in 2024. This is expected to result in a 7% rise in dividends, compared to a 6% increase last year. Ohsung Kwon, a US equity strategist at BofA Securities, offers a more optimistic outlook, forecasting a 12% boost in dividends this year, fueled by accelerating earnings growth.
Dividends historically accounted for 40% of the market’s total return from 1936 to 2012 but have contributed only 16% over the past ten years, according to a research note from BofA Securities released late last year. Looking forward, Kwon anticipates that dividends will have a more significant impact on total returns compared to the previous decade.
Dividends hold particular significance, especially as the broader market has experienced consecutive gains of over 20%, a scenario not seen since the late 1990s. Moreover, the low payout ratio, currently at 29% compared to the historical average of 50%, suggests there is considerable potential for companies to increase their dividend payouts. Kwon pointed out that another key factor supporting dividend investing is the growing number of retired baby boomers seeking income. With cash products yielding around 4%, there is a strong demand for dividends, as investors are looking for immediate cash returns and are pressuring companies to increase their dividend distributions.
This optimism about dividend stocks is largely rooted in their historical performance, as they have been instrumental in reducing overall portfolio volatility and can help cushion losses when stock prices decline. Research indicates that dividend-paying stocks often outperform their non-dividend-paying counterparts during bear markets, such as during the tech bubble burst in the early 2000s and the global financial crisis. This may be because companies that pay dividends are typically larger, more established, and more profitable, making them more resilient than the broader market.
From October 2019 to September 2024, a period marked by significant fluctuations in the market’s total performance, equity income funds demonstrated lower volatility and reduced downside risk compared to the broader market. Given this, we will discuss the most reliable dividend stocks to invest in.
Our Methodology:
For this list, we used a stock screener to identify companies with a history of dividend growth spanning over 10 years. From this group, we selected companies offering dividend yields of at least 1% as of January 12. From that selection, we identified the ten stocks that hedge funds favored the most during the third quarter of 2024, based on data from Insider Monkey’s database. The stocks are ranked in ascending order of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A home improvement store overflowing with a variety of products and supplies.
The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Holders: 82
The Home Depot, Inc. (NYSE:HD) ranks fifth on our list of the best dividend stocks. The American home improvement company is currently facing some challenges. As the business is closely tied to the housing market, it has been affected by rising interest rates and inflationary pressures on consumers in recent years. However, Home Depot remains the dominant player in its industry, which management values at $1 trillion. The aging housing stock, combined with a shortage of available homes, is expected to drive long-term demand. In addition, the recent decline in interest rates should provide some support. In the past 12 months, the stock has surged by nearly 10%.
In the third quarter of 2024, The Home Depot, Inc. (NYSE:HD) reported $40.22 billion in revenue, marking a 6.6% increase from the same quarter last year. It achieved operating income of $5.4 billion, with an operating margin of 13.5%. The growth was driven by higher customer demand for seasonal products and outdoor projects, along with a boost in sales from hurricane-related needs.
Carillon Tower Advisers made the following comment about HD in its Q3 2024 investor letter:
“While Home Depot, Inc.’s (NYSE:HD) recent reported earnings were somewhat tepid, the market seems to be pricing in an inversion of the company’s sales, driven by lower interest rates. Home Depot reported its seventh consecutive quarter of same-store sales declines, giving back substantial gains that it enjoyed during the pandemic. High mortgage rates have also put a damper on existing home sales. People typically spend the most on home repairs and improvements in years when they buy or sell houses, often conducting both transactions in the same year.”
The Home Depot, Inc. (NYSE:HD) maintained a strong cash position in FY24. In the first nine months of the year, the company generated over $15 billion in operating cash flow. This strong financial performance allows the company to continue its reputation as a reliable dividend payer. It has been consistently increasing its dividend payouts to shareholders for 14 consecutive years. Its quarterly dividend currently comes in at $2.25 per share for a dividend yield of 2.31%, as of January 12.
Of the 900 hedge funds tracked by Insider Monkey at the end of Q3 2024, 82 funds held stakes in The Home Depot, Inc. (NYSE:HD), down from 86 in the previous quarter. These stakes have a total value of roughly $7.6 billion.
Overall HD ranks 5th on our list of the most reliable dividend stocks to buy according to hedge funds. While we acknowledge the potential of HD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
