Passive income is loosely defined as income generated without active involvement. Who doesn’t want to earn extra money with minimal effort? Three common sources from which investors can generate this type of income are rental property ownership, licensing royalties and stock dividends – a favorite among investors such as Warren Buffett.
I have highlighted two companies below that share common characteristics to be the foundation on which to build a successful portfolio. Investing in these stocks can put investors on the right track to achieving their financial goals and reaping the benefits that passive income brings.
Lowe’s (DOWN -2.72%) and Sherwin-Williams (SHW -3.86%) both serve a similar market and have seen 50% growth in sales and profits over the past five years. They also boast over 40 consecutive years of growing dividends, which can provide investors with the benefit of compounding earnings to increase the total value of a portfolio through dividend reinvestment.
Lowe’s has raised dividends for 47 years in a row
Lowe’s has learned a key lesson during the pandemic: getting products into the hands of its DIY and professional customers as quickly and easily as possible. In February, the company announced a partnership with Instacart, an online grocery platform, for same-day delivery of home improvement products. The service offers shoppers in Boston and Charlotte same-day delivery of more than 20,000 different Lowe’s products, with plans to introduce the program to other cities in 2022.
Expanded offerings like this should help fuel revenue growth. Stores Executive Vice President Joe McFarland emphasized on the latest earnings call that “enhancing our execution capabilities will allow us to accelerate this growth and continue to gain market share.”
Earlier this year, CEO Marvin Ellison confirmed that Lowe’s was indeed gaining market share. Revenues have jumped 33% over the past two years, and although growth will slow in fiscal 2022, the average age of homes in the United States continues to climb, a long-term tailwind for l ‘company. Halfway through management’s forecast, Lowe’s expects to generate $13.35 in earnings per share this year, up 11%.
This strength on the bottom line is fueling the retailer’s annual dividend increases. Lowe’s has been increasing its payouts every year for 47 years, and when you have a record like this, it earns you a spot on the distinguished list of dividend aristocrats – S&P500 companies that have increased their annual dividends for at least 25 consecutive years.
So if you invest $10,000 in Lowe’s at the time of this writing, you’ll get 55 shares. The current dividend pays $4.20 per share on an annualized basis. Using the company’s average dividend growth rate of 20% over the past 10 years, investors who choose to reinvest dividends could be looking at more than $4,000 in passive income after just seven years, without the price of the action only earns a single penny.
Sherwin-Williams is tapping into the booming home improvement market
One of the products you can get at Lowe’s is paint. Nearly 71% of homeowners take on projects that include painting, making paint the most commonly purchased home improvement product. This makes paints and coatings the world leader Sherwin-Williams an intriguing dividend stock for investors, as the global home improvement market is expected to grow at an annual rate of 6.4% through 2028.
Most people know Sherwin-Williams for its eponymous brand, but customers who switch to other banners like Valspar, Minwax or Thompson’s continue to entrust their income to Sherwin-Williams, which has a broad portfolio of brands.
Its products are sold in nearly 4,500 stores across the Americas and the Caribbean. First quarter sales increased 7.4% year-over-year, driven by the Performance Coatings Group, which recorded double-digit growth on higher volumes and prices . Unfortunately, this did not help offset the effect of inflation on raw material costs, resulting in lower net income year over year.
Regardless, CEO John Morikis said demand remains strong in the latest press release. Once price increases take effect to offset rising costs, the business is expected to experience strong growth. Expect full-year earnings to meet previous guidance of $9.45 per share at the midpoint, representing a 16% increase from 2021.
Steady growth, positive net income and a growing market should allow this dividend aristocrat to continue his 42-year streak of increasing payouts. The company’s $2.40 per share dividend yields 1%, but even at that modest level, a $10,000 investment today would still give shareholders over $4,000 in passive income after 12 years, considering the 10-year dividend growth rate of 17%. And again, that’s without a single dollar of appreciation in the price of the stock itself.