Unfortunately for fans of passive income, there isn't (yet) a "Magnificent Seven" of dividend stocks you can choose from while building up your portfolio. If such a list existed, though, the stocks in it would represent profitable companies with unusually long track records for raising their dividend payouts. To make this exclusive club, a business would also need to be able to pay out a significant portion of annual earnings without risking a dividend cut during economic downturns.
Lowe's(NYSE: LOW) might not be near the top of most investors' lists as a potential magnificent stock. It trails industry leader Home Depot(NYSE: HD) in some critical metrics, after all, including market share growth and profitability. However, it has some characteristics that make it stand out as an attractive dividend payer. Let's take a closer look.
Why Lowe's might qualify as "magnificent"
There are precious few retailers on the list of Dividend Kings (companies that have increased their dividends for 50 or more consecutive years). That's because the industry faces sharp demand swings tied to shifts in consumer spending patterns. Profit margins tend to be low as well, which doesn't translate into especially stable earnings growth.
Lowe's has made it on that exclusive list of roughly 50 companies, though, even while its peer, Home Depot, looks on from the sidelines. Industry leader Home Depot was forced to pause its payout hikes during the worst of the Great Recession, while Lowe's managed to maintain its steady increases. Its record of 51 consecutive years puts it up there with other potential "magnificent" dividend stocks like Walmart and Pepsi.
The latest results
Investors can see from its recent operating results that Lowe's can keep earnings growing even under tough selling conditions. That's an absolute prerequisite for a top dividend stock, which must be able to afford consistent payout hikes no matter what's going on in the wider market.
LOW Dividend data by YCharts
The home improvement industry shrank last year as home sales slowed amid rising interest rates, for instance. Lowe's was still able to increase net earnings to $7.7 billion, up from $6.4 billion in 2022. As a result, the retailer could easily afford to boost its dividend payment to $4.35 per share from $3.95 per share in the prior year.
Not in the top tier
Ultimately, though, Lowe's doesn't fit in the highest tier of dividend stocks. That's partly because its business is so sensitive to economic growth swings. The company can only commit to returning about 35% of annual earnings as dividend payments for that reason. Meanwhile, retailers like Walmart promise to give back closer to 50% of profits.
Another knock against Lowe's as a dividend stock is the fact that it's not a leader in its industry. That position confers many benefits, such as higher profit margins and faster growth, which Home Depot enjoys over its smaller peer today. Lowe's shares also pay a relatively low yield of less than 2%.
That's no reason to ignore Lowe's as a dividend stock, though. It could generate impressive returns for investors willing to patiently hold its shares while the retailer works to close the performance gap it faces with Home Depot. In the meantime, Lowe's is a great, but not quite magnificent, dividend stock.
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Demitri Kalogeropoulos has positions in Home Depot. The Motley Fool has positions in and recommends Home Depot and Walmart. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
