Three Reasons I Like the Home Depot: Parts, Patriotism, and Profits
Recently the toilet in our master bathroom was whispering all the time. That is not a good sign. I went to the local Home Depot and looked at several different replacement parts. The one I selected looked like a perfect solution. It did not require tools and it was adjustable. As it turned out, it was easy to replace without tools and now the toilet is silent. I like HD because it is a good place to get the things we need for various old home repairs.
I also like the HD because, as a veteran, I am given a 10% discount at checkout. Over time that saves us a lot of money. Finally, I like HD because they pay me as an owner. In fact, they pay me more each year for our 100 shares.
If you own shares of VYM or SCHD, then you already have an investment in the Home Depot. However, one advantage of HD stock is that the 5-year dividend growth rate is better than either ETF’s 5-year growth rate.
EIS Investment Number Five
This is the fifth in the series. My goal is to present arguments in favor of a simplified and uncomplicated way to have income before and in retirement that grows even if we do nothing.
The best way to help you see how easy money works is by example. Today’s example focuses on a company in the Consumer Discretionary sector. The Home Depot is a good player in that sector.
In each of these educational posts I discuss: 1) The nature of the investment, 2) The reason it may qualify as easy money, 3) The quality of the investment using outside resources to help gauge quality, and the 4) Factors that determine if and when I buy shares of the investment. In each case I will be talking about an investment that we own.
The Nature of HD
Most of the HD stores I have been to are big. They carry a lot of merchandise that is useful year-round. They also sell seasonal products, and my wife likes to shop their garden and flower areas while I like to look at tools, hardware, and anything else they put in the aisles. They also have a decent website which I have used from time to time. I was an employee for a bit before I retired, and I thought they did a respectable job training me to do my work.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products The company also offers installation services for flooring, cabinets and cabinet makeovers, countertops, furnaces and central air systems, and windows. In addition, it provides tool and equipment rental services. The company primarily serves homeowners; and professional renovators/remodelers, general contractors, maintenance professionals, handymen, property managers, building service contractors, and specialty tradesmen, such as electricians, plumbers, and painters. It also sells its products through websites, including homedepot.com; blinds.com, an online site for custom window coverings; and thecompanystore.com, an online site for textiles and décor products. The Home Depot, Inc. was incorporated in 1978 and is based in Atlanta, Georgia.
Why I Think HD Qualifies using EIS*
There are always three numbers I want to see. The first is the Dividend Payout Ratio. HD’s DPR is 46.70%. Any payout ratio, for most investments, should be between 20-70%. HD also has a good 5-Year Dividend Growth Rate of 16.06%. Think of it this way: If inflation is 5-6%, then the HD is keeping me ahead of that dastardly reality. The third number is the number of years of Dividend Growth. For the Home Depot, the number of years is 13.
The Quality of the Investment
Since 2019 HD has given us $1,933.50 in dividends. But that is just a small piece of the puzzle. HD is also a great stock to own for trading options: for trading covered call options. Since May 2021 I have traded options and received $4,182.68 in additional income. That buys a lot of toilet parts.
Sometimes my shares are “called away.” That happened in October 2021, and I had to relinquish my shares of HD for $347.50/share. I was patient and was able to buy 100 shares in March 2022 for $319.95. So there are times when it makes sense to take profits and then later hop back in and rebuy the shares.
Because HD has an annual dividend payout of $8.36 per share, it is reasonably certain that I will receive $836 in dividends in 2023. That will buy a lot of flowers, mulch, manure, potting soil, and flowerpots at the HD.
Factors I Consider Before Buying
It is always wise to consider what other think. At the present time the QUANT rating for HD is a HOLD. The same is true of the Weiss Rating. The scores on StockRover are also satisfactory but don’t currently motivate me to buy more shares. However, if you want to own 100 shares of HD, then the best approach for the long-term is to buy ten shares at a time. The shares currently trade at about $285, so 10 shares would cost $2,850. If this is not more than 1% of your total investments, it would be a good way to start. Then, if the price dropped to $275/share, adding another 10 shares would lower your average cost basis.
Reminder: What is EIS?
EIS is my abbreviation for “Easy Income Strategy.” Each value needs to be at least a “3” or I will pause and not rush to buy. If most of the values are “4” or “5”, I will either buy, or continue to hold or add more shares. Therefore, “5” is a strong reason to buy, “4” is a good reason to buy, and anything lower than a “3” is a cause for potential concern.
The Home Depot is a worthy long-term investment. As I noted at the beginning, if you own shares of ETF VYM, then you already own shares of the HD. HD is in the top ten investments of VYM. It is also in the top ten investments of SCHD. In fact, according to ETF.COM, there are 325 ETFs that hold HD shares.
“Home Depot, Inc. is a company in the U.S. stock market and it is a holding in 325 U.S.-traded ETFs. HD has around 94.9M shares in the U.S. ETF market. The largest ETF holder of HD is the SPDR S&P 500 ETF Trust (SPY), with approximately 10.99M shares. Investors may also find of interest that the ETF with the largest allocation to HD stock is iShares U.S. Consumer Focused ETF (IEDI), with a portfolio weight of 11.21%. On average, U.S. ETFs allocate 1.47% of HD to their portfolios.” – Source: ETF.COM
You should not be surprised to know that these all have shares of the Home Depot: SPY SPDR S&P 500 ETF Trust, IVV iShares Core S&P 500 ETF, VOO Vanguard S&P 500 ETF, and VTI Vanguard Total Stock Market ETF. I think it makes more sense to own VYM and SCHD.
I currently own 100 shares of HD stock. Because Cindie and I have a lot of VYM shares, our ownership is actually greater than that.
The Easy Income Strategy – What is Easy Income?
We need to define “easy.” When I say easy, I don’t mean there is no work involved. Rather, the term is meant to convey simplified, unhurried, user-friendly, and uncomplicated. Therefore, it isn’t about trying to sell something, and it certainly isn’t about trading options. It also isn’t about trying to time the market with a buy low and sell high strategy. It is about a process that results in income, and the primary goal is to minimize the time spent while maximizing income that grows over time.
Easy Money is Easy
Easy money is money you can easily acquire. It is income obtained with a minimum of effort. It sounds too good to be true. In fact, most of the time when someone pitches something that is too good to be true, it isn’t true. I think there are some exceptions.