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Income-oriented investors have been facing a perfect storm since last year due to the ongoing bear market and the surge of inflation to a nearly 40-year high. Excessive inflation is eroding the real value of the dividends that investors receive as well as the real value of their investment portfolios. Blue chip stocks are great candidates for the portfolios of income-oriented investors. Blue chip stocks are established stocks, which have raised their dividends for more than 10 consecutive years. In this article, we will discuss the prospects of three blue chip stocks that are attractive right now, namely Home Depot (HD), Parker-Hannifin (PH), and Williams-Sonoma (WSM).
 

Home Depot

Home Depot is a home improvement retailer, with more than 2,300 stores in the U.S., Canada, and Mexico. It was founded in 1978 and has grown to an immense retailer, which has reached a market capitalization of $302 billion and thus it is one of the 30 stocks of Dow Jones.

The primary competitive advantage of Home Depot is the fact that the company operates in an essential duopoly, as its main competitor is Lowe’s (LOW). Both companies have been growing consistently for several years, without trying to open many new stores or engage in a price war. As a result, Home Depot enjoys one of the widest business moats investors can hope for. The company also enjoys strong brand recognition and great economies of scale thanks to its vast network.

The positive effect of weak competitive forces is clearly reflected in the exceptional performance record of Home Depot. During the last decade, the company has grown its earnings per share every year, at an impressive average annual rate of 18.3%. The outstanding growth record combined with the consistent performance are testaments to the rock-solid business model of Home Depot. While the home improvement retailer is likely to decelerate in the upcoming years, it is still likely to keep growing its earnings per share meaningfully for many more years.

Home Depot is currently offering a 10-year high dividend yield of 2.8%. This yield is lackluster for most income-oriented investors. However, the company has grown its dividend by 20.7% per year on average over the last decade and by 16.4% per year on average over the last five years. Thanks to its healthy payout ratio of 46%, its reliable growth trajectory, and its pristine balance sheet, Home Depot is likely to continue raising its dividend at a double-digit rate for many more years. It will thus compensate patient investors for its uninspiring current dividend yield.
 

Parker-Hannifin

Parker-Hannifin is an industrial manufacturer that has great expertise in motion and control technologies. It manufactures components that are obscure but critical to the operations of heavy machinery, factory equipment, and aircrafts. As a result, the company operates in highly profitable niche markets.

Thanks to its focus on its niche markets, Parker-Hannifin has exhibited an admirable performance record. The company has grown its earnings per share in 8 of the last 9 years, by 12.9% per year on average. The consistent performance combined with the high growth rate of the company are testaments to its rock-solid business model.

The primary growth driver of Parker-Hannifin has been its proven ability to acquire smaller competitors, incorporate their products into its immense global network and achieve great synergies from these acquisitions. Parker-Hannifin has always maintained a strong financial position in order to have sufficient cash for highly profitable acquisitions.

The most recent acquisition is the one of Meggitt, a global leader in aerospace and defense motion and control technologies. Parker-Hannifin paid $8.8 billion in cash for this acquisition. Meggitt offers technology and products on every major aircraft platform and has annual revenues of $2.3 billion. As the value of the transaction is 20% of the market capitalization of Parker-Hannifin, the acquisition will certainly be a significant growth driver for the company in the upcoming years.

Thanks to its consistent growth record, Parker-Hannifin has managed to raise its dividend for 66 consecutive years. It is thus a Dividend King, with one of the longest dividend growth streaks in the investing universe. The stock is currently offering a dividend yield of only 1.5%. However, the low current yield has resulted merely from the exceptionally low payout ratio (27%), which management targets in order to preserve funds for acquisitions.

Moreover, the company has grown its dividend by 12.0% per year on average over the last decade and by 13.7% per year on average over the last five years. Therefore, even income-oriented investors with a long-term perspective may consider purchasing this exceptional stock. More importantly, the focus of Parker-Hannifin on investing in its growth instead of offering more generous dividends has certainly rewarded the shareholders.
 

Williams-Sonoma

Williams-Sonoma is a specialty retailer that operates home furnishing and houseware brands, such as Williams-Sonoma, Pottery Barn, West Elm, Rejuvenation, Mark and Graham, and others. The retailer operates traditional retail locations but also sells its products through e-commerce and direct-mail catalogs.

Most retailers were hurt by the coronavirus crisis in 2020-2021. Even worse, they are currently facing a strong headwind due to sky-high inflation, which has greatly increased the operating costs of retailers and has taken its toll on consumer spending. Williams-Sonoma is a bright exception to the rule. Not only has the company proved resilient to these headwinds, but it has also achieved blowout earnings in each of the last three years. The record performance has resulted from the swift adjustment of the company to the challenging business conditions and the shift of focus of consumers towards the improvement of their houses.

Williams-Sonoma has exhibited an enviable performance record. To be sure, the company has grown its earnings per share every single year over the last nine years, at an eye-opening average annual rate of 21.7%. The exceptional growth record is proof of the rock-solid business model of Williams-Sonoma and its exemplary management.

Unfortunately, Williams-Sonoma is not completely immune to the surge of inflation, which has increased the cost of raw materials, freight costs, and labor costs of the retailer and has led consumers to curtail their discretionary expenses. Moreover, due to the aggressive interest rate hikes implemented by the Fed, the housing market has slowed down lately. All these factors are negative for Williams-Sonoma. Nevertheless, thanks to its solid business execution, Williams-Sonoma is poised to report just a 4% decrease in its earnings per share for 2022. It is also remarkable that its earnings per share in 2022 will be more than triple its earnings per share in 2019.

It is also important to note that the Fed has prioritized restoring inflation to its long-term target of 2%. Thanks to the aggressive policy of the Fed, inflation has subsided every single month since it peaked last summer. As soon as inflation reverts to normal levels, Williams-Sonoma is likely to return to its high-growth trajectory.
 

Final Thoughts

The above three stocks have grown their earnings and dividends at a fast pace for more than a decade thanks to their reliable business models. They are all experiencing business deceleration lately due to the recent economic slowdown but they are likely to return to high-growth mode whenever the economy rebounds. Patient investors who purchase these stocks during the ongoing downturn are likely to be highly rewarded in the long run.

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