We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold Now. In this article, we are going to take a look at where Lowe’s Companies, Inc. (NYSE:LOW) stands against the other dividend growth stocks.
The AI sector maintained its momentum unabated in the second quarter of 2024, with tech stocks continuing to lead the charge. Despite the Fed scaling back rate cut expectations from three to one at the quarter’s outset, stocks surged to end in positive territory by quarter-end. This was buoyed by better-than-expected inflation numbers and strong first-quarter earnings. The broader market gained 3.48% in Q2 2024 and its 12-month returns came in at over 23.4%. Dividend stocks underperformed the broader market recently, but with tech giants now beginning to issue dividends, analysts are optimistic about dividend prospects this year. The recent addition of Alphabet to the dividend-paying group suggests that these mega-cap tech companies could increase their dividends gradually over time. However, analysts caution that current dividend yields from these stocks remain relatively modest.
In the current market environment, investors are keenly exploring opportunities to boost their income. Despite their low performance so far this year, dividends gain importance in this regard as they have historically been crucial in generating returns for investors over many decades. Since 1960, approximately 85% of the total cumulative return of the S&P 500 Index can be traced back to reinvested dividends and the compounding effect they offer.
When we talk about the compounding effects of dividends, we refer to the advantages they provide, particularly when they grow consistently over time. This growth allows for larger dividend payouts which, when reinvested, can further accelerate the overall investment return through compounding. In addition to providing compounding effects, companies that raise their dividends have also historically outperformed the market and those companies that cut or don’t pay dividends at all. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 9.62% return to shareholders from 1972 to 2018, compared with an 8.78% return of dividend payers. Dividend growers also outperformed dividend non-payers, who returned only 2.40% during this period. Read more about dividend growers in our article, Best Dividend Kings to Buy for Safe Dividend Growth.
A company’s past track record of growing dividends is often the best crystal ball for predicting future growth. A low payout ratio, which measures dividends against earnings, also signals potential for future dividend growth. High dividend yields can falter in tough times, precisely when investors rely on them most. Companies with a history of dividend growth demonstrate their resilience, continuing to increase dividends even in downturns. Currently, there is rising demand for companies that distribute dividends, driven by an aging US population, seeking additional sources of immediate income. According to a report by Janus Henderson, global dividends reached $1.66 trillion in 2023, growing from $1.23 trillion in 2020. The banking sector achieved record-high dividends last year, accounting for half of the global dividend growth. This increase was largely facilitated by a higher interest rate environment, which allowed many banks to expand their profit margins. The firm expects global dividends to reach their all-time high of $1.72 trillion in 2024, which would show a 3.9% growth from 2023 on a headline basis.
Companies that consistently raise their dividends have strong business models and solid balance sheets. In this article, we will take a look at some of the best dividend aristocrat stocks for dividend growth.
Our Methodology:
For this article, we scanned the list of Dividend Aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. 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 family excitedly browsing through the aisles of a home improvement retail store.
Lowe’s Companies, Inc. (NYSE:LOW)
5-Year Annual Dividend Growth Rate: 18.04%
Lowe’s Companies, Inc. (NYSE:LOW) tops our list of the best dividend aristocrat stocks with an 18.04% annual average dividend growth over the past five years. The home improvement retailer operates a network of 1,700 stores across the US, offering a wide range of related products catering to both do-it-yourself (DIY) enthusiasts and professional customers. The company derives the majority of its total revenue from DIY shoppers. However, in the most recent quarter, the company mentioned that demand for DIY projects has decreased as consumers are now directing their spending more toward travel and dining out.
In addition to DIY projects, Lowe’s Companies, Inc. (NYSE:LOW) faces ongoing challenges in the current macroeconomic climate. Higher interest rates and persistent inflationary pressures have dampened consumer enthusiasm for large purchases and costly home renovation projects. Despite these challenges, the company remained financially stable. It has maintained consistent profitability, with its trailing twelve-month operating margin of 12.42%. The company’s revenue for Q1 2024 came in at $21.4 billion, which beat analysts estimates by $256.5 million.
Lowe’s Companies, Inc. (NYSE:LOW) remains committed to a disciplined capital allocation strategy aimed at creating long-term, sustainable shareholder value. In the most recent quarter, the company repurchased around 3 million shares amounting to $743 million, and paid out $633 million to shareholders through dividends. The company offers a quarterly dividend of $1.15 per share and has a dividend yield of 2.17%, as of July 2. It is one of the best dividend aristocrat stocks on our list as the company has been growing its dividends consistently for the past 60 consecutive years.
As per Insider Monkey’s database of Q1 2024, 60 hedge funds owned stakes in Lowe’s Companies, Inc. (NYSE:LOW), down from 68 in the previous quarter. The consolidated value of these stakes is over $2.4 billion. With over 1.4 million shares, Soroban Capital Partners was the company’s leading stakeholder in Q1.
Overall LOW ranks 1st on our list of the best dividend growth stocks to buy and hold. You can visit 10 Best Dividend Growth Stocks to Buy and Hold Now to see the other dividend growth stocks that are on hedge funds’ radar. While we acknowledge the potential of LOW as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than LOW but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.