Dividends are a great source of passive income that can help supplement your earned income. The good news is that it’s not difficult to identify and buy a basket of dividend stocks that can help you generate this income stream.
There are several characteristics I look for when filtering good dividend stocks for my portfolio. First, they need to be a cash-generating company with a leading market position that allows them to continue to generate healthy and growing free cash flow. They also need to have a solid track record of paying increasing dividends over time.
The key to growing your dividend income is to steadily buy shares of such companies and then grow your dividends by reinvesting them in the same companies. Over time, the increase in dividends per share, along with a higher stake in the company, will allow you to increase the amount of dividends you receive per year. The idea is to build a stream of passive retirement income that you can comfortably rely on in your golden years. It’s not a difficult process to understand, but it does take patience and perseverance.
Here are three dividend stocks that meet the requirements and can help you slowly build your wealth over the years.
1. Enbridge
Enbridge (NYSE: ENB) Enbridge, Inc. is a diversified energy services company with four core divisions: liquids pipelines, natural gas pipelines, gas utilities and storage, and renewable energy. The company is a major player in the energy sector, supplying approximately 30% of the crude oil produced in the U.S. and transporting one-fifth of the natural gas consumed there. This strong market position enables Enbridge to generate steady cash flow as it holds a dominant position in the energy services industry.
The company saw revenue rise and then fall from CA$47.1 billion in 2021 to CA$53.3 billion in 2022 and then to CA$43.6 billion in 2023. Net income was impacted by one-time items over the years, along with the impairment of goodwill and long-lived assets, but averaged about CA$5.9 billion over the three years. Enbridge’s free cash flow, however, was more consistent, rising from CA$1.2 billion in 2021 to CA$9.3 billion in 2023.
The company’s growing free cash flow generation has allowed it to continuously increase its dividends over the years. The last quarterly dividend was CA$0.915, capping a 29-year streak of uninterrupted dividend increases at an annual rate of approximately 10%.
Enbridge has been paying dividends to shareholders for more than 69 years, marking an impressive track record for the energy company. Enbridge should be able to continue this dividend growth with the recent acquisition of three natural gas utilities to bolster its business, which has already received federal approvals. Its Renewable Energy division is also executing on the growth initiatives outlined at its Investor Day with several projects in the U.S. and Canada signing power purchase agreements with blue-chip companies like Amazon and AT&T.
In the first half of 2024, Enbridge continued to deliver strong financial results with distributable cash flow of CA$6.3 billion, up from CA$5.9 billion in the prior year. Management’s focus on low capital intensity and utility-like growth means investors should continue to see Enbridge’s dividend grow in the coming years.
2. Home Depot
Home Depot (NYSE: HD) is the world’s largest home improvement retailer, with 2,340 stores and more than 760 locations in 50 U.S. states, 10 Canadian provinces, and Mexico. The company has significant influence in the retail industry and is a legendary name that many rely on to find a wide variety of merchandise.
The company saw revenue remain flat from 2021 to 2023, rising from $151.2 billion to $152.7 billion, while gross profit remained flat at around $50.8 billion to $51 billion due to inflationary pressures. Net income declined slightly from $16.4 billion in 2021 to $15.1 billion in 2023, mainly due to higher interest expenses as interest rates rose over the past two years.
On the positive side, Home Depot’s free cash flow remained consistently high, averaging $14.5 billion per year from 2021 to 2023. This consistency has allowed the retailer to increase its dividends every year since 2008, with the last dividend being $2.25 per quarter, up 7.7% year-over-year.
The company saw its first-half 2024 profit hit by higher expenses again, with net income falling 4.3% year over year to $8.2 billion. Free cash flow remained strong, coming in at $9.3 billion and on track to surpass the $17.9 billion level in 2023. With inflation declining over the past year, Home Depot should see the rise in expenses ease, easing the pressure on profits.
The company should also see further growth, as Home Depot acquired SRS Distribution, a specialty residential retail distribution company, in March 2024 for approximately $18.25 billion. This should allow Home Depot to expand its offerings to better serve remodelers and renovators and will add $50 billion to the company’s total addressable market, pushing it to $1 trillion. While the transaction will be financed primarily through debt and will be EPS-accelerating in the first year, management expects the acquisition to be earnings-boosting from the second year onwards.
Meanwhile, Home Depot opened four new distribution centers earlier this year to further expand its ecosystem into Detroit, South Los Angeles, San Antonio and Toronto. These new centers will improve accessibility for customers who need access to large, bulky goods and increase the company’s appeal while strengthening customer loyalty.
3. North Son
North Son (NASDAQ: NDSN) Nordson, Inc. is a precision engineering company that provides applications to the consumer, medical, electronics, and industrial sectors. The company has an excellent track record of paying increasing dividends and is one of the few Dividend Kings out there. Nordson recently increased its quarterly dividend by 15% year over year from $0.68 to $0.78, marking its 61st consecutive dividend increase and giving the company one of the longest unbroken streaks of increases.
The company has shown steady improvement in both revenue and net income over the years. Revenue went from $2.4 billion in 2021 to $2.6 billion in 2023, while net income increased from $454.4 million to $487.5 million over the same period. Free cash flow averaged $525 million per year from 2021 to 2023, and Nordson’s dividend payout ratio increased from just 22% to 31% over this period, which explains why the company was able to continue to pay out more.
In the first half of 2024, Nordson continued its streak of free cash flow generation with $273 million. Net income for the half fell 1.7% year over year to $227.8 million, despite revenue rising 1.8% year over year as financing costs more than doubled.
Despite this, the company is only paying out 40% of its profits as dividends if we use the latest annualized EPS of $7.90 and compare it to the annualized dividend per share of $3.12. This simple calculation shows that the company still has plenty of room to increase dividends and still reinvest the majority of its profits into growth.
Nordson is also expanding its business through acquisitions, with the acquisition of ARAG completed in August of last year helping to expand the company’s reach into the fast-growing precision agriculture sector. In May of this year, Nordson acquired Atrion Corporation for approximately $800 million to expand its medical portfolio into new markets and therapies. The acquisition is complementary to Nordson’s customer base and should be accretive to its results going forward.
With these growth engines, Nordson appears well positioned to continue growing earnings, free cash flow and dividends going forward.
Should You Invest $1,000 in Home Depot Now?
Before you buy Home Depot stock, here are some things to consider:
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Royston Yang has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge and Home Depot. The Motley Fool has a disclosure policy.
3 Dividend Stocks to Double Down on Now was originally published by The Motley Fool
