Finding great dividend stocks can be challenging. Investors must find companies with sustainable moats that generate consistent earnings, which is ideal for a rising dividend over time as well. Companies that have been able to achieve this over the long term, such as the Dividend Kings, are generally great for income investors.

In this article, we’ll take a look at one of the best dividend growth stocks in the market today, home improvement retailer Lowe’s (LOW).

Photo courtesy: Miosotis Jade via Wikimedia

Overview and recent events

Lowe’s is the second-largest home improvement retailer in the US, behind rival Home Depot (HD). Lowe’s still enjoys a significant scale, however, with more than $90 billion in annual revenue and a market capitalization of $138 billion. The company also has an extremely impressive 57-year dividend increase streak.

Lowe’s reported its first-quarter earnings on May 19^th, and results were excellent on both the top and bottom lines. Total sales were up from $19.7 billion in the year-ago period to $24.4 billion this year. The gain was due to a staggering 26% gain in comparable sales, as the company lapped the early stages of the pandemic. Net earnings were up from $1.3 billion to $2.3 billion as well, as margins increased significantly with higher volumes. On a per-share basis, earnings were $3.21, up 81% year-over-year.

Lowe’s also repurchased 16.8 million shares in Q1 for $3.1 billion, in addition to its $440 million in quarterly dividends. We’ve updated our expectations for this year, and now see $11.01 in earnings-per-share for 2021.

Growth catalysts

While Lowe’s undoubtedly saw rapid growth in Q1 due in part to the pandemic conditions of last year, we believe the company has long-term growth prospects that can rival most businesses. The housing market in the US has been very strong since the Great Recession, providing more than a decade’s worth of growth to Lowe’s and its rivals. Since home buyer demand remains strong amid rising housing prices, and construction is booming in a strong economy, there is ample evidence to suggest Lowe’s is far from done growing.

In addition, Lowe’s has invested enormous amounts of money in its e-commerce platform in recent years, setting itself apart from the competition by making it easy to buy supplies digitally, and either have them delivered, or placed for pickup in the store. Lowe’s recognized years ago this was the future of retail and invested accordingly. We see this convenience factor as aiding the company’s growth outlook by helping Lowe’s remain highly competitive for all kinds of consumers and contractors.

In total, we expect Lowe’s to post very impressive 7% annual earnings-per-share growth going forward.

Long-term dividend growth

Lowe’s yields just 1.7% today, but the value is in the payout growth potential. Lowe’s has a 57-year dividend increase streak that we believe has the potential to continue to increase for decades to come. The current payout ratio is under a quarter of earnings, which is extremely low, and with projected earnings-per-share growth of 7% annually, there will be plenty of excess capital generated each year to continue to raise the payout. We currently expect the payout to match the growth rate of earnings at 7% annually, meaning Lowe’s not only has an impressive earnings growth story, but a dividend growth story to match.

Final Thoughts

Investors looking for dividend growth stocks should look for sustainable moats, long-term earnings growth potential, and reasonable (or low) payout ratios. Lowe’s has all of these and more, and we believe long-term tailwinds such as its strong competitive position, as well as macro factors such as the housing and construction markets will see Lowe’s remain a great dividend growth stock for years to come.