We recently compiled a list of the 8 Magnificent Dividend Growth Stocks to Buy Now. In this article, we are going to take a look at where Lowe’s Companies, Inc. (NYSE:LOW) stands against the other magnificent dividend growth stocks.
This year, dividend stocks have underperformed compared to the broader market, largely because tech stocks have captured most of the attention. The Dividend Aristocrats Index, which tracks companies with at least 25 consecutive years of dividend growth, has risen by nearly 10% year-to-date, compared to the broader market’s almost 24% gain. Despite this, dividend stocks remain a reliable choice for investors, consistently delivering returns to shareholders regardless of market conditions.
Investors tend to favor companies with strong histories of dividend growth. This preference stems from the fact that such stocks have reported solid long-term returns, often outperforming the broader market. According to a report by RMB Capital, dividend growers and initiators delivered an annual average return of 9.62% from 1972 to 2018, compared with a 2.40% return of the companies that did not pay dividends. Moreover, the broader market returned 7.30% during this period, underperforming dividend growers. The report further mentioned that companies with a track record of increasing dividends have demonstrated their ability to not only maintain but also grow payouts, even during market downturns. From a portfolio management standpoint, dividend growth portfolios offer good diversification, as companies with consistent dividend growth are typically spread across various industries. This provides an edge over portfolios that prioritize high dividend yields, which are often concentrated in mature sectors such as utilities and, before 2007, financials.
Also read: Dividend Contenders List: Top 15
Analysts suggest including dividend stocks in income portfolios. This recommendation is bolstered by the fact that several leading tech companies introduced dividend policies this year and are likely to sustain dividend growth over time, supported by their strong cash flows. David Harrell, editor of Morningstar’s DividendInvestor newsletter, shared his insights on dividend growth during a recent interview with the firm. Here are some comments from the analyst:
“You see headlines about dividend increases. That’s generally viewed as positive. There’s this whole idea of dividend growth investing by identifying companies that are growing their dividends at a regular pace. That’s indicative of companies with strong growing earnings. That’s considered positive. There’s also this idea that dividend stocks can be defensive in recessionary periods.”
While dividend stocks have shown slower performance this year, companies continue to raise their dividends steadily. A recent report from S&P Dow Jones Indices revealed that 480 dividend hikes were recorded in Q3 2024, up from 448 in Q3 2023, reflecting a 7.1% year-over-year growth. The total value of these increases for the quarter reached $14.1 billion. The report also mentioned that over the past 12 months, total dividend increases amounted to $74.7 billion, marking a rise from $63.9 billion in the previous 12-month period.
Our Methodology:
For this article, we scanned the list of Dividend Aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 8 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A family excitedly browsing through the aisles of a home improvement retail store.
Lowe’s Companies, Inc. (NYSE:LOW)
5-Year Average Annual Dividend Growth Rate: 16.9%
An American retail company, Lowe’s Companies, Inc. (NYSE:LOW) specializes in home improvement. The stock has surged by nearly 24% in 2024 so far, despite encountering certain challenges within the industry this year. The company’s cash position is very strong, which makes it one of the best dividend aristocrat stocks on our list. In the second quarter of 2024, its operating cash flow came in at $7.4 billion, up from $6 billion in the same period last year. The company ended the quarter with over $4.3 billion available in cash and cash equivalents, compared with $3.5 billion in the prior year period. It also remained committed to its shareholder obligation, returning $629 million to investors through dividends.
In addition to its strong cash generation, Lowe’s Companies, Inc. (NYSE:LOW) delivered impressive earnings in Q2, showcasing strong operational results and improved customer service despite challenging macroeconomic conditions, especially for homeowners. The success of its Total Home strategy was reflected in mid-single-digit growth in comparable sales among Pro customers during the quarter. While the majority of its revenue comes from DIY shoppers, the company observed a decline in demand for DIY projects, as consumers have been shifting their spending priorities toward travel and dining out.
That said, Lowe’s Companies, Inc. (NYSE:LOW) faced weak sales during the quarter. The company posted revenue of $23.6 billion, down 5.5% from the same period last year. The revenue also missed analysts estimates by $372.3 million. Madison Investments also highlighted this in its Q3 2024 investor letter. Here is what the firm has to say:
“In the third quarter, the top five individual contributors to performance relative to the benchmark were Parker-Hannifin Corporation, Fiserv, Lowe’s Companies, Inc. (NYSE:LOW), Brookfield Corporation, and Progressive Corporation. Despite operating in very different sectors, Lowe’s Companies and Brookfield Corporation are both expected to benefit from the economic activity spurred on by declining interest rates. The Federal Reserve’s decision to lower interest rates sparked investor enthusiasm for both companies during the quarter, even as their sales and profits continue to moderate. For Lowe’s, sales remained weak in the latest quarter as most measures of the housing market remain sluggish. However, if interest rates come down and mortgages become more affordable, activity should return to the housing market which will boost Lowe’s business.”
Lowe’s Companies, Inc. (NYSE:LOW) offers a quarterly dividend of $1.15 per share. The company is a strong dividend payer with 59 consecutive years of dividend growth under its belt. Moreover, its 5-year average annual dividend growth rate comes in at nearly 17%. The stock has a dividend yield of 1.70%, as of November 14.
Overall LOW ranks 2nd on our list of the magnificent dividend growth stocks to buy now. While we acknowledge the potential of LOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LOW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.