Two Dividend Stocks to Consider This January: Walmart and Home Depot

Finding dividend-paying stocks with solid growth potential can be tough. To keep dividends flowing and invest in new opportunities, companies need sufficient free cash flow (FCF).

Once you identify such companies, it’s wise to review them periodically. January serves as a practical time for this assessment.

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Walmart: A Dividend Champion

Walmart (NYSE: WMT) is a giant in retail, serving approximately 255 million customers each week through its stores and Sam’s Clubs. The company’s strategy of maintaining low costs has attracted many shoppers.

Management is enhancing customer experiences by investing in technology, such as online ordering and same-day delivery options in many locations.

Recent results show that Walmart continues to thrive. The U.S. segment reported a same-store sales increase of 5.3% for the fiscal third quarter, with over half of that growth coming from e-commerce. This period ended on October 31, 2024.

Adjusted operating income increased by 6.2% for the quarter when you exclude foreign currency impacts, and management predicts at least an 8.5% profitability increase for the entire year.

Having initiated dividends in 1974, Walmart has consistently increased payouts, earning the title of Dividend King. In the first nine months of the year, it reported a strong FCF of $6.2 billion, which easily covered the $5 billion in dividends.

Investors have taken notice, as the stock surged more than 71% over the past year, significantly outperforming the S&P 500’s 23%. Currently, Walmart shares carry a price-to-earnings (P/E) ratio of 37, compared to the S&P 500’s 30, but this higher valuation seems justified given its strong performance and growth outlook.

Home Depot: A Solid Contender

Home Depot (NYSE: HD), established in the late 1970s, is now the largest home improvement retailer, boasting annual sales exceeding $150 billion.

The company’s performance often correlates with economic conditions. Home improvement tends to rise when individuals feel financially secure enough to undertake major projects.

Currently, Home Depot’s performance has faced challenges due to economic factors like high-interest rates, which make buying homes and financing projects more costly. Rising prices for essentials have also made homeowners hesitant to invest in construction.

In its fiscal third quarter ending October 27, 2024, Home Depot reported a decline of 1.3% in same-store sales, with an anticipated yearly decline of 2.5% for comps.

However, there are positive signs of recovery. Existing home sales climbed 4.8% in November, and with the Federal Reserve lowering short-term rates, home equity loan rates are likely to drop, encouraging financing for renovations.

Since 2010, Home Depot has consistently raised its dividends. Despite recent earnings challenges, a payout ratio of 60% indicates that the dividend remains secure.

Though shares increased by 12.7% in the past year, they lagged behind the S&P 500. Still, if economic conditions improve, Home Depot is well-positioned to see increased sales and earnings.

The stock trades at a P/E ratio of 26, presenting a discount compared to the S&P 500.

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Lawrence Rothman, CFA has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein belong to the author and do not necessarily reflect those of Nasdaq, Inc.