Why Income Investors Should Consider HD Stock
June 7, 2017
HD Stock: One That Rewards Long-Term Investors
Investors may occasionally want to purchase a stock by perfectly timing the bottom and selling it at its highest price. My words of advise is that this is quite difficult to achieve and positive returns come from the time in a stock and not market timing.
Case and point: Home Depot Inc (NYSE:HD). Ten years ago, HD stock would have returned investors with total return of 423%. This return is not based solely on the stock price increasing; it also factors in the dividend income.
The returns that have been generated over the last decade are a prime example of the benefits of buying and holding on to a quality dividend-paying stock. However, this investment strategy requires patience in order to pay off greatly in the end.
But that 10 years is in the past. Is HD stock currently a great dividend-paying stock that could reward shareholders going forward? Based on Home Depot’s present and future potential, I believe that there is more growth ahead.
From the 10 year return, 340% came solely from the stock price. Investors were bidding up the share price because the top-level revenue was increasing and more was being reported on the bottom line, with wider margins being accounted for. For instance, the net income calculated after paying for operation fees and the cost of goods sold has nearly doubled over the past 10 years.
Home Depot’s administration has been working hard, with tighter controls on expenses, better rational pricing on products, and more efficient supply chain management. But this trend is not a one-quarter story; as time goes on, more methods should be realized to make the business even more efficient, and in turn profitable.
Another reason why the share price has increased over the 10-year period and could continue to do so is share buybacks. Over the past four years, the total outstanding share count has gone from 1.5 billion to 1.2 billion. The number of outstanding shares should continue to decrease thanks to the $15.0-billion share repurchase program authorized in January. This does not affect the market cap of the company despite investors now owning larger percentages of it. (Source: “The Home Depot Announces Fourth Quarter And Fiscal 2016 Results,” Home Depot Inc, February 21, 2017.)
The rest of the 10-year returns were based on the income that was received through the dividend, which marked 83% in returns. The dividend is paid on a quarterly basis and has been growing annually, which has certainly helped.
Over the past 10 years, the dividend has grown 295%, in part because 50% to 55% of earnings are paid out via the dividend. As sales increase, so will the per-share payout. Since the dividend payout is very conservative, it means that Home Depot has the ability to return more money to shareholders.
Final Thoughts On HD stock
Being a long-term investor in HD stock may not only generate a substantial return, but also remove the aspect of market timing. Investing is the long term by its very nature anyway, so as a business grows, your portfolio should do the same. The methods used by Home Depot are especially beneficial to long-term investors, including share buybacks and a growing dividend.
HD stock is currently offering a yield of 2.3%.
