If you're looking for income from your investments, dividend stocks represent a stellar option for your money. Not only do they provide income streams, but both their dividend payments and principal value can grow over time.
However, picking the right dividend stocks for your portfolio isn't always straightforward. Sometimes, high-yield dividend stocks could be one quarter away from cutting their dividends in half. Meanwhile, some low-yield dividend stocks may be stuck in neutral. But Home Depot (NYSE: HD) and Microsoft (NASDAQ: MSFT) each offer investors a well-rounded investment opportunity, including meaningful dividend yields and dividend and principal growth potential.
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With Home Depot stock, investors get an opportunity to buy shares of one of the highest quality retailers in the stock market. Thanks to Home Depot's strong leadership position in the fast-growing home improvement market, the company has been "printing" a growing stream of cash over the last five years, with trailing-12-month dividend payments soaring 155%.
Home Depot's fast-rising dividend, which averages out to annual growth of 21.6% over the past five years, has been supported by an impressive 77% increase in free cash flow during the last five years.
Going forward, there's good reason to expect Home Depot's dividend to continue growing. Not only is Home Depot currently paying out just 44% of its earnings, but the home improvement retailer continues to grow strongly today. Trailing-12-month EPS is up 17.4% year over year, and analysts expect Home Depot's EPS to increase by about 12.2% annually over the next five years.
Microsoft is also setup for likely dividend growth in the future, though the growth may not be as strong as Home Depot's. Helping make up for its lower dividend growth potential, Microsoft investors get to own the tech giant at a more conservative price-to-free cash flow ratio of 17.9, compared to Home Depot's at 20.4.
It's also worth noting that Microsoft's 2.5% average annual dividend increase over the past five years may understate the company's future dividend growth potential. Indeed, Microsoft's most recent dividend increase was more than three times this five-year average rate; in December 2016, Microsoft's quarterly dividend increased by 8%. Furthermore, while Microsoft's payout ratio of 56.8% is lower than Home Depot's, it still leaves room for meaningful dividend growth in the coming years.
Like Home Depot, Microsoft's underlying business is growing, making the case for ongoing dividend growth even stronger. Microsoft's trailing-12-month revenue and EPS is up 5.4% and 29.3%, respectively, year over year. In addition, analysts expect Microsoft's EPS to increase at a rate of about 10.1% annually over the next five years -- a growth rate that could help sustain annual dividend increases closer to the 8% hike Microsoft gave investors more recently.
Sure, both Home Depot and Microsoft's dividend yields of 2.3% and 2.2%, respectively, aren't mouthwatering. But when investors consider the recent fundamental performance of these two companies, as well as each companies' dividend growth potential, both are great options for dividend investors.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.