It looks like The Home Depot, Inc. (NYSE:HD) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 2nd of December will not receive the dividend, which will be paid on the 17th of December.
Home Depot's next dividend payment will be US$1.50 per share, on the back of last year when the company paid a total of US$6.00 to shareholders. Based on the last year's worth of payments, Home Depot has a trailing yield of 2.2% on the current stock price of $273.96. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Home Depot paid out 52% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Home Depot generated enough free cash flow to afford its dividend. Fortunately, it paid out only 35% of its free cash flow in the past year.
It's positive to see that Home Depot's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Home Depot's earnings per share have risen 20% per annum over the last five years. Home Depot is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Home Depot has delivered 20% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Is Home Depot worth buying for its dividend? Home Depot's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. There's a lot to like about Home Depot, and we would prioritise taking a closer look at it.
While it's tempting to invest in Home Depot for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 2 warning signs for Home Depot you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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