Investors looking to generate passive income have discovered a gold mine with Home deposit (HD -3.54%). One of the best ways to increase passive income is to buy stocks that pay dividends. This is why Home Depot has been so good for passive income investors; it has almost sextupled its dividend over the past decade.

Passive income investors who bought 1,000 shares of Home Depot in 2013 saw their dividends jump from $1,160 to $6,600. Let’s see how Home Depot accomplished this feat and whether today’s passive income investors can expect something similar in the future.

HD dividend per share (annual) given by Y-Charts

Home Depot rewarded passive income investors

Of course, Home Depot has thrived since the pandemic began. Home has become an even more critical aspect of people’s lives as they work, learn and play more often at home. Over its past two years, Home Depot sales have jumped 20% and 14.4%, respectively. Meanwhile, earnings per share rose 16.5% and 30%. But that wasn’t the start of Home Depot’s success.

The company was growing its revenue and profits sharply even before the outbreak. Over the past decade, The Home Depot has grown revenue at a compound annual rate of 7.9%. More importantly, earnings per share increased at a rate of 20.2%. I say “larger” because dividends are paid out of profits. For investors looking to generate passive income, a company with rapidly growing profits offers great potential. Home Depot’s excellent earnings growth explains why it increased its dividend payout from $1.16 in 2013 to $6.60 in its last fiscal year.

HD payout rate given by Y-Charts

The Home Depot’s payout ratio, which measures the percentage of earnings paid out as dividends, was 43% when it was last updated in 2022. This means the company paid out less than half of its earnings as dividends. dividends. The rest of the money is reinvested in the business.

For passive income investors interested in Home Depot, it can maintain its strong dividend payout with a margin of safety when earnings fluctuate. This is great news, because the last thing you want when building a recurring income stream is for payments to decrease or pause.

Is it too late to buy Home Depot stock?

The short answer is no. Home Depot stock price is down 30% from its highs. The market is worried about Home Depot’s near-term outlook as economies reopen and consumers shift spending from home improvements to restaurants and travel.

HD Price to Free Cash Flow given by Y-Charts

Home Depot’s falling stock price allows it to trade at a price-to-free cash flow ratio of 28 and a price-to-earnings multiple of 19, a relatively fair valuation compared to its previous five-year averages. The company’s reasonable price, strong earnings, and dividend growth make it a great choice for investors looking to generate passive income.