These industry-leading companies should continue rewarding investors with dividend raises for years to come.
The stock market can be an excellent vehicle for building wealth over time. But it can also be used to generate passive income from dividends without the need to sell stock.
The Dow Jones Industrial Average is chock-full of blue chip dividend-paying companies — including Walmart (WMT -0.07%), Home Depot (HD -0.13%), and Chevron (CVX -0.65%).
Investing $2,500 into each stock should generate at least $200 in passive income per year. Here’s why all three dividend stocks are worth buying now.
Image source: Getty Images.
Walmart is back and better than ever
Walmart has put on a turnaround masterclass. In just a couple of years, it has gone from slowing growth and lower margins to accelerated growth and reasonable margins.
In its fiscal 2025 second quarter, Walmart grew net sales by 4.7% and operating income by 8.5% compared to the same quarter in its last fiscal year. It is generating considerably higher membership income thanks to the consistent growth of Sam’s Club and the expansion of its home delivery program, Walmart+.
For the first half of fiscal 2025, which ended July 31, Walmart’s membership and other income were up 18.5%, or nearly half a billion dollars — which had a considerable impact on its bottom line since membership income is high margin. If Walmart can generate more income from subscriptions, it can move closer to a Costco-like business model where very little profit is made on selling goods and services, and membership fees drive profits.
In addition to growing its subscription business and e-commerce, Walmart has made several internal improvements, such as better inventory management and investments in automation.
Walmart could go from a single-digit growth business to a double-digit growth business while passing profits to shareholders through dividends and buybacks. Its most recent dividend raise in February was its largest in over 10 years — boosting the payout by 9%. I would expect similar-sized raises moving forward.
Walmart is up 44% year to date and has become much more expensive — with a forward price-to-earnings ratio of 31 and a dividend yield of just 1.1%. Since it is being priced more as a growth stock, investing in Walmart could be a great long-term decision even at its elevated valuation — but only for investors with a higher risk tolerance who don’t mind generating far less passive income than they could be getting from other Dow stocks.
Home Depot is built to last
Home Depot is down less than 6% from its all-time high. The stock has been on the rise, which may seem odd given Home Depot reported decent, but not great second-quarter fiscal 2024 results a couple of weeks ago and lowered its full-year guidance.
Like Walmart, Home Depot investors seem more focused on the company’s trajectory than its current results. Home Depot has done a good job managing through lower consumer spending on discretionary goods and higher interest rates — which have impacted spending on housing and home improvement projects.
As Home Depot management discussed on the recent earnings call, the pandemic pulled forward demand for many of its products. Home Depot has faced an extremely challenging combination of inflation-related cost pressures and consumers that can delay big-ticket home improvement spending until better financing terms are available when interest rates come down.
As Home Depot executive vice president of merchandising, Billy Bastek, said on the second-quarter fiscal 2024 earnings call: “Big-ticket comp transactions for those over $1,000 were down 5.8% compared to the second quarter of last year. We continued to see softer engagement in larger discretionary projects where customers typically use financing to fund the project such as kitchen and bathroom remodels.”
In a vacuum, Home Depot’s results aren’t great. But within the context of a downturn, just a few percentage points of lower sales and earnings are quite impressive. Home Depot has a stable and growing dividend — which it can easily afford to raise throughout this downturn thanks to its reasonable payout ratio. All told, Home Depot and its 2.4% yield are a good choice for investors that don’t mind cyclicality.
Chevron can thrive without Hess
While investors may hold an optimistic disposition toward Walmart and Home Depot, they may be too focused on the current state of Chevron. The oil major is slightly down year to date compared to a 16% gain for its peer, ExxonMobil. Over the last five years, Exxon is up 72% compared to just 28% for Chevron.
Exxon is delivering impressive results — checking all the boxes of accelerating oil and gas production, investing in low-carbon solutions, and setting clear profitability goals across its business units.
Last October, Chevron and Exxon announced their largest acquisitions in over a decade. Exxon completed its acquisition of Pioneer Natural Resources in early May. But Chevron’s acquisition of Hess (NYSE: HES) is delayed. Hess holds a 30% stake in a drilling consortium offshore Guyana, while Exxon has a 45% stake, and CNOOC has a 25% interest. Exxon is not only blocking Hess from passing ownership to Chevron, but it may even be looking to poach the stake for itself — giving it a majority interest. Hess could remain an independent company or sell to Exxon. But either way, the uncertainty regarding the transaction makes Chevron less of a polished investment opportunity than Exxon at this time.
The assets Chevron would get from Hess would diversify its business with some potentially cash-cow international assets. But Chevron doesn’t need the deal to be successful. It is developing plenty of projects that have nothing to do with Hess.
Chevron has increased its dividend for 37 consecutive years and yields 4.5% — making it an excellent choice for passive income investors looking to buy an out-of-favor oil major.
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, Costco Wholesale, Home Depot, and Walmart. The Motley Fool has a disclosure policy.