A Close Look at Home Depot Inc's Dividend

By Markets Fool.com

Like all of its fellow Dow members, Home Depot (NYSE: HD) is committed to paying a significant dividend to its shareholders. The home improvement titan sent $3 billion of cash to investors last year and is on track to deliver almost $3.5 billion in 2016.

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Image source: Getty Images.

Below, we'll put that hefty payout into perspective for income investors and look at the prospects for market-beating dividend growth from here.

How Home Depot's dividend stacks up

Home Depot's stock yields 2.2%, putting it slightly ahead of the overall S&P 500 and just above rival Lowe's (NYSE: LOW), which pays 2%. Within the dividend-heavy Dow, though, the retailer is one of the stingiest companies around. In fact, there are only seven stocks with lower yields than Home Depot's on the blue chip index. Yet, as I'll discuss in detail below, that weakness is more about the company's surging share price than unusually slow dividend growth.

Home Depot's $3 billion payout accounted for 43% of the $7 billion in earnings that it produced last year. The retailer targets delivering half of its profits back to shareholders in the form of dividends, which is near the average payout ratio for stocks as a whole. Since it isn't aggressively expanding its store footprint, though, Home Depot is more generous in this regard than many of its retailing peers. Lowe's is committed to paying just 35% of earnings in dividends while it adds roughly 50 stores per year to its base.

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Recent dividend growth

Home Depot's dividend growth has far outpaced the market over the last several years. The most recent hike was 17% -- and that followed the prior year's 26% boost and 2014's 21% raise. Overall, the company now pays as much in dividends as it produced in earnings just five years ago.

Investors can thank the broad recovery in the housing market for those awesome gains. After all, Lowe's dividend has been growing at about the same pace since 2011.

LOW Dividend data by YCharts.

Prospects for future growth

Home Depot is targeting a 16% spike in profit this year, which implies another double-digit raise for income investors in early 2017. The longer-term picture looks even healthier for this retailer.

Image source: Home Depot.

Home Depot is planning to grow sales at a 5% compound annual rate through 2018, when executives plan to pass $100 billion of revenue for the first time. Profits should improve at a much faster clip. CEO Craig Menear and his team are forecasting that operating margin will rise to 15% of sales, up from below 12% in 2013.

The key drivers for those gains will be continued market share growth as Home Depot expands deeper into the professional side of the home improvement industry. Its recent acquisition of Interline Brands also gives it a significant presence in the maintenance, repair, and operations segment that it hopes to capitalize on over the next few years.

Of course, continued steady growth in the home improvement market will also be important. Home Depot's management believes the fundamentals of the industry, including household formation rates and average age of housing stock, are very supportive of long-term gains even if overall economic growth sputters around below-average rates.

Risks to hitting these targets include a surprise industry slowdown and rising competition from rivals focused on e-commerce. But if the retailer can navigate these and other challenges, as it has over the last five years, then dividends should closely track profits substantially higher by 2021.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.