Looking for Foundational Dividend Stocks to Build Your Portfolio Around? Consider This Dow Jones Passive Income Powerhouse

Home Depot (NYSE: HD) is a retailer that needs no introduction. The company has over 2,300 stores across North America -- making it a well-known one-stop-shop for do-it-yourself tasks, professional contractors, and a services segment that can help customers with their home improvement projects.

Home Depot's expansion has corresponded with a strong stock performance. Its market capitalization has jumped from around $50 billion 15 years ago to over $380 billion today. As an industry leader and a component of both the S&P 500 (SNPINDEX: ^GSPC) and Dow Jones Industrial Average (DJINDICES: ^DJI), Home Depot is about as blue chip as it gets.

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Here's why Home Depot remains a foundational dividend stock that passive income investors can build their portfolio around for 2025 and beyond.

Image source: Getty Images.

Home Depot is holding firm despite challenges

Home Depot's updated guidance from November (when it reported third-quarter fiscal 2024 results) calls for a 2.5% comparable stores decline for the full fiscal year and diluted earnings per share (EPS) to fall by 1% when adjusted for the company's 53-week fiscal year. So overall, weak results. Especially when factoring in relatively easy comps.

In fiscal 2023, Home Depot's comparable sales fell 3.5% while diluted EPS fell 9.5%. Suffice to say, Home Depot is undoubtedly in a multiyear downturn, which is evident when looking at its stagnating sales growth and falling operating margins in recent years.

HD Revenue (TTM) data by YCharts

Despite the poor results, Home Depot stock hasn't seen significant declines. It's up around 11% over the last three years and 57% over the last five years. That said, it is underperforming the S&P 500.

Given the negative comparable sales growth, the stock has been resilient, likely because the market cares more about where a company is going than where it is today. Home Depot's long-term investment thesis hasn't changed. It's just that the current macroeconomic backdrop is a major headwind for Home Depot.

Macro woes

High interest rates make it more expensive to finance home improvement projects. Elevated mortgage interest rates dissuade home purchases, which can lead to lower home sales. The Case-Shiller Home Price Index, which measures residential real estate prices in the U.S., is at a 10-year high. Mortgage interest rates are near a 10-year high. And U.S. credit card debt is over $1.2 trillion -- a near 50% increase from pre-pandemic levels.

US Credit Card Debt data by YCharts

Meanwhile, U.S. existing home sales are near a 10-year low and down around 20% from pre-pandemic levels -- suggesting fewer homes are being sold. And the U.S. fixed housing affordability index is around 100, which means that only a median household income with a 20% down payment can afford a home. Essentially, buyers looking to make a lower down payment or those with a below-median income are somewhat priced out of the market.

US Existing Home Sales data by YCharts

In a perfect world, Home Depot would prefer everyone to have a home and be able to afford home improvement projects. So a strained housing market shows just how difficult the current operating environment is. But there are always two sides to a coin.

The glass-half-empty outlook on Home Depot is that the macro backdrop is bad and shows no signs of improvement. So, near-term growth could remain stalled in the foreseeable future.

The glass-half-full perspective is that Home Depot's results are barely going down despite so many challenges -- a testament to the strength of its brand.

In other words, 2023 and 2024 have acted as a stress test on Home Depot, and the company has passed with flying colors.

Committed to dividend growth

When it comes to sizable dividend raises over the last 15 years, few companies can compete with Home Depot. The company has raised its quarterly dividend from $0.25 per share in 2011 to $2.25 per share in 2024 -- with consistent raises every year during that period.

Investors have been able to count on raises like clockwork. Since 2013, Home Depot has announced a dividend raise in February or March (around the same time it reports full-year fiscal earnings). So, investors can expect another raise from Home Depot when it reports earnings on Feb. 25.

Home Depot's consistent and significant dividend raises and dividend yield of 2.3% make it a solid choice for passive income investors.

Home Depot is cheaper than it looks at first glance

In addition to its strong dividend, Home Depot sports a reasonable valuation. Its price-to-earnings (P/E) ratio is 26.2 and its forward P/E is 24.5 compared to a 22.9 median P/E over the last 10 years. Although Home Depot looks a little overvalued at first glance, it's important to recognize that the home improvement industry is currently in a slowdown. So, Home Depot's stock price has been outpacing its earnings growth in recent years.

Home Depot could be a coiled spring for economic growth. The company completed its acquisition of SRS Distribution for $18.25 billion in June 2024. The acquisition gives Home Depot extra exposure to the contractor market, helping diversify the overall business. The full potential of the acquisition has yet to be realized because of the slowdown in the industry.

The ability to make a countercyclical move of this size is a testament to the strength of Home Depot's balance sheet, management's focus on long-term strategy rather than short-term results, and Home Depot's willingness to make a big-time acquisition, even if it takes a while to pay off.

All told, Home Depot looks a little pricey now. But the stock could start to look really cheap during the next expansion period, especially considering the added boost from SRS.

A solid blue chip stock to buy now

Companies that operate in cyclical industries tend to see big ebbs and flows in their sales and earnings. But not Home Depot. Zoom out, and the company's performance is like a steady climb higher and then a flat line rather than a big downturn.

With fiscal 2025 marking the first full year post-integration of SRS, we could see a slight uptick in sales and earnings, even if interest rates remain high.

Home Depot is an excellent dividend stock to buy if you have a long-term time horizon. The growing dividend provides a worthwhile incentive to hold the stock through slowdowns. And the valuation is reasonable given the factors discussed. However, expect Home Depot's near-term results to be under pressure until the macro climate improves.

Should you invest $1,000 in Home Depot right now?

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.