2 Top Stocks to Buy Now if You Want Decades of Passive Income

Key Points

• The two companies remain committed to paying dividends.

• Paying dividends remains one of Home Depot's top capital allocation priorities.

• Target recently raised its dividend, running its streak to 54 years.

• 10 stocks we like better than Home Depot ›

Many investors think about a stock's appreciation potential. But those looking to receive a regular income can also find equities to invest in. In fact, it's one of the ways you can earn passive income.

Of course, you still have to do your homework. That's especially true when you have an investment time horizon measured in decades. These two stocks have a history of raising payouts year after year and higher dividend yields than the market, as measured by the S&P 500 index.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

The stocks also offer potential price appreciation, making them ideal for patient investors seeking attractive total returns.

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1. Home Depot

Home Depot (NYSE: HD) produces the highest sales among home improvement retailers. This ubiquitous presence, combined with attractive prices, makes it a popular shopping destination for individuals and professional contractors.

Home Depot's sales have been sluggish lately. But that's because homeowners have been putting off major projects due to factors like high interest rates that have raised the cost of borrowing, and inflation eating away at their spending power.

The company's fiscal second-quarter same-store sales (comps) increased 1%, although foreign currency translations subtracted 0.4 percentage points. Broken out, traffic took away 0.4 percentage points, while spending added 1.4 percentage points. The period ended Aug. 3.

I'm confident that homeowners will conduct major renovations, out of necessity or the desire to change their homes. It's merely a question of timing. When they do, it seems likely that they'll go to Home Depot given its convenience and price advantage.

In the meantime, paying dividends remains one of management's top capital allocation priorities. It comes right after investing in growth initiatives.

The board of directors has increased the payout every year since 2010. Even during the challenging years of the Great Recession, Home Depot kept its quarterly dividend constant.

Currently, the company has plenty of free cash flow (FCF) to support dividends. Home Depot produced $7.2 billion in FCF during the first half of the year compared to $4.6 billion in dividends.

The stock has a 2.3% dividend yield, more than 1 percentage point higher than the S&P 500's 1.2%.

2. Target

Target (NYSE: TGT) became a popular shopping destination for consumers looking for basic items and differentiated merchandise sold exclusively at its locations. It proved a successful formula for a long time, but the company's sales have been impacted by several factors over the last few years.

These include persistently high prices that have hurt its customers' ability to spend at Target and, more recently, a boycott when management decided to curtail diversity, equity, and inclusion initiatives. However, when the inflationary cycle ends, shoppers will undoubtedly increase spending at Target stores. The company has also been meeting with community leaders to address certain issues that led to the boycotts.

Target's fiscal second-quarter comps dropped 1.9% for the period that ended Aug. 2. Lower traffic accounted for 1.3 percentage points of the decline, and reduced spending was responsible for the balance.

Target also announced that it will promote Chief Operating Officer Michael Fiddelke to CEO next February. He promises urgent action to accelerate sales and profit growth.

Meanwhile, Target remains committed to increasing dividends. In June, it announced a 1.8% increase in the quarterly payout to $1.14. The company has paid dividends since 1967 and raised them for 54 straight years. That makes Target a Dividend King. With a 52% payout ratio, the company can easily afford the higher payments.

At the new dividend rate, Target's stock yields about 4.6%.

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

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Lawrence Rothman, CFA has positions in Target. The Motley Fool has positions in and recommends Home Depot and Target. The Motley Fool has a disclosure policy.