1 Top Dividend Stock Idea for 2025 and Beyond

With stocks generally looking quite expensive after an epic 2024, when the S&P 500 index rose 23% and the tech-heavy Nasdaq Composite soared nearly 29%, investors would be wise to exercise prudence when picking new stocks for their portfolios in 2025. Many stocks seem overvalued at their current valuations -- especially tech stocks, which have benefited from significant valuation multiple expansion.

Nevertheless, there are still some reasonably priced, high-quality companies worth considering adding to your portfolio this year. One solid stock idea for investors looking to venture beyond tech in order to find something attractive is rural lifestyle retailer Tractor Supply (NASDAQ: TSCO). After underperforming the S&P 500 last year, the stock looks compelling today -- especially compared to the overall market. Further, the company pays a nice, growing dividend, too.

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A 2024 slowdown

A look at Tractor Supply's full-year 2024 guidance for comparable-store sales to grow at a measly rate of 0% to 1% may raise some eyebrows. But investors considering the stock need to consider that the company has been up against some incredibly tough year-over-year growth comparisons recently. COVID-19 shutdowns led to a surge in retail sales as consumers shifted some of their spending away from travel, services, and entertainment toward goods. Tractor Supply was a huge beneficiary of this trend, evidenced by its increase in annual sales between 2019 and 2022. Its annual sales rose from $8.3 billion in 2019 to $14.2 billion in 2022.

Such robust growth in the rearview mirror means it's difficult to post strong growth rates these days -- especially as consumer spending patterns normalize, with more of the budget going back to travel, services, and entertainment again.

An opportunistic repurchase program

But Tractor Supply management is well aware that this is just a temporary slowdown. That's likely one reason why the company has been taking advantage of its stock's underperformance, repurchasing its shares in droves. It repurchased 0.6 million shares in the third quarter of 2024 alone. Further highlighting management's confidence in its ability to get back to its 86-year history of robust and consistent growth, management recently told investors it expects to grow sales at a rate of 6% to 8% annually over the next five years.

A fast-growing dividend

Also worth some attention is Tractor Supply's impressive dividend history. Since initiating a dividend in 2010, the payout has grown dramatically. In 2010, the company paid out just $0.04 per share every quarter. Today, it's paying out $1.10 per share every quarter. Even more, its dividend has nearly tripled in size since 2020, increasing from $0.40 to $1.10.

Looking ahead, Tractor Supply's dividend should continue increasing. This should be supported by further sales growth (assuming management's ambitions for 6% to 8% annualized growth in sales over the next five years is achievable) and a fairly low payout ratio today. A low payout, defined as the percent of earnings a company is paying out in dividends, means that there is plenty of wiggle room for further dividend growth even if earnings doesn't grow. A good payout ratio is less than 80%, and a great payout ratio is below 50%. Tractor Supply's payout ratio is 42%.

With strong dividend growth potential and a meaningful dividend yield of about 1.7%, Tractor Supply is an excellent dividend stock.

Overall, Tractor Supply has the characteristics of a great business and an attractive stock, making it a good stock to consider investing in as part of a diversified portfolio. While investors will have to keep an eye on risks, including intense competition in retail overall, Tractor Supply has the makeup of a well-rounded stock with great staying power, likely to outperform the market over the long haul.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tractor Supply. The Motley Fool has a disclosure policy.