Home Depot Stock: Is a Big Dividend Increase Coming?

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Home Depot (NYSE: HD) announced on Tuesday that it will release its fourth-quarter and full-year results on Feb. 26. When the home-improvement retailer provides an update on its recent performance, investors will be looking for more strong earnings-per-share and revenue growth, helped by continued momentum in digital sales and the company's professional customers.

But some investors will be looking beyond typical top- and bottom-line metrics to an update on the company's dividend, as Home Depot typically announces a dividend increase alongside its fourth-quarter update each year. Given how rapidly its dividend has been growing in recent years, Home Depot has undoubtedly attracted lots of dividend investors -- and they'll be looking closely to see what's in store for the company's dividend in 2019.

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Home Depot's dividend

Home Depot has an impressive dividend history. For nine years straight, its dividend has increased every year. Another dividend boost in 2019, therefore, would mark the company's tenth dividend increase in a row.

What's even more impressive is just how sharply the dividend has been growing. Over the past five years, that dividend has increased at an average rate of 25% year over year. Sure, growth has decelerated recently -- but it's still impressive. In 2018, Home Depot bumped up its dividend by 15.8%.

When you combine the company's 15.8% dividend increase this time last year with the stock's flat performance over the past 12 months, Home Depot's dividend yield has risen from levels below 2% to a more meaningful yield of 2.2% at the time of this writing.

What to expect

But Home Depot's current dividend yield may not fully appreciate the income investors will receive over the next 12 months, as the company's history of robust and consistent dividend growth and its strong business momentum in 2018 suggest another double-digit dividend increase will likely be announced later this month.

Capturing Home Depot's dividend potential is the company's conservative payout ratio, or its dividend payments as a percentage of its earnings. With a payout ratio of 42%, the home-improvement giant has plenty of room for dividend growth.

But more important to the company's dividend growth potential is Home Depot's strong underlying business. For the nine months ending Oct. 28, 2018, Home Depot's operating income rose 5.7% compared to the same period in 2017. Net income jumped 28% during the same period. In addition, comparable-store sales are on pace to rise about 5.5% year over year in 2018, management forecast in its third-quarter update in November.

With this background in mind, Home Depot could easily support another rise in its dividend in line with its 15.8% hike last year. So, keep an eye out for a dividend increase announcement later this month.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.