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When Home Depot (NYSE: HD) sends dividend checks to investors later this month, it will mark the 112th consecutive monthly dividend from the home improvement retailer.
And while this consistency is a great thing, it’s not the only thing. The Home Depot dividend has also been growing.
Consistent dividends and regular dividend growth are a powerful combination. Home Depot has increased its dividend every year for the last six years. So it comes as little surprise that the stock has performed so well in recent years.
Shares of Home Depot are up more than 300% since the start of 2010. The S&P 500 has risen less than 90% over the same period.
The latest Home Depot dividend hike will boost the company’s quarterly payout by 25.5%. In addition, it’s worth noting that this isn’t the company’s largest dividend boost in the past six years.
The 2013 Home Depot dividend increase resulted in a 34.5% bump in the company’s quarterly payout. Indeed, its dividend has risen by 16% or more every year since 2012.
With a payout of roughly 24 cents a share at the start of 2010, the new dividend payout of 59 cents a share represents a total increase of nearly 150%.
Can Home Depot keep raising its dividend at this pace?
Let’s first take a quick look at the housing industry.
With more jobs being added every month and the economy finally starting to see wage increases, macroeconomic tailwinds are driving the housing industry higher. The most recent housing data suggests that January new home construction was up 8.1% year-over-year.
Whether it’s new construction, major renovations or simply homeowners wanting to add landscaping or a new touch to their homes, Home Depot is poised to profit.
Even Lowe’s (NYSE: LOW), Home Depot’s biggest competitor, is up more than 200% since the start of 2010. Clearly the huge success of the home improvement industry isn’t isolated to Home Depot.
Dividend hikes aren’t the only way Home Depot has been returning capital to shareholders. The chart below shows the falling number of Home Depot shares. It has been a continued trend as its share buyback program has expanded.
It certainly helps Home Depot pay bigger dividends when its share count keeps falling and it has to pay fewer total dividends.
The big question is: Can Home Depot keep up the huge dividend hikes?
The answer is yes.
In 2011, the company stated that its target dividend payout ratio is between 40% and 50%. As the money has kept flowing in, the company has kept raising its dividend.
The payout ratio sits at around 39.9% right now. After the new dividend increase and future earnings estimates, the payout ratio should soon rise.
But as earnings rise, the payout ratio will again fall and Home Depot will be able to increase its dividend again.
Of course, Home Depot stock can certainly be called “expensive.” It trades at a PE ratio of 24.6 and a forward PE ratio of 22.1. Compare that to the S&P 500, which trades at a PE ratio of 19.6 and a forward PE ratio of 16.6.
In short, Home Depot shares are expensive because investors are willing to pay more for them than the average S&P 500 stock. But Home Depot isn’t the average S&P 500 stock.
With a declining share count, rising dividends and powerful macroeconomic trends behind it, there is little question that the Home Depot dividend is safe. And indeed, it’s very likely to continue growing.
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