Home Depot Continues to Impress on Dividends

After the market closed on May 22, 2008, Home Depot (HD) announced that its board of directors declared a first quarter cash dividend of 22.5 cents per share. The dividend is payable on June 19 to shareholders of record on the close of business on June 5.

This extends the string of flat dividends to seven dating back to the November 2006 dividend. Since 2004, HD has raised its dividend in the month of November (except November 2007). The flat dividend this quarter did not surprise me. I also expect the August 2008 dividend to remain flat at 22.5 cents. This is where it gets interesting.

The way HD has timed its dividend increases, it showed a year-over-year [YOY] increase for calendar year 2007. Even after eight flat dividends, HD can still end up with a YOY increase from 2007 to 2008 with an increase in November 2008. Management knows this.

Though not as bad as a dividend cut, a flat dividend is a close second. From a perception standpoint, a YOY flat dividend will not bode well with the dividend investing contingent of HD's shareholders. HD's 3.34% yield is good, but not good enough for most dividend investors to swallow a flat YOY dividend. The 3.34% yield is misleading since a large portion of it came through HD's share price decline. For example, my yield-on-cost (annual dividend $/cost basis) is 2.49%, significantly lower than the current yield.

Beyond the broader problem of declining residential construction, HD continues to battle with customer service issues. Home Depot Chief Executive Frank Blake was grilled by several shareholders at the company's annual meeting about substandard customer service experiences in HD stores.

As noted in my "State of the Dividend Address", I currently have HD "On The Shelf." This means I am taking a wait and see approach and not adding to my position. If HD does not increase its dividend over the next two quarters, I will reevaluate to determine if it belongs in my dividend income portfolio.

At the time of this writing, I owned shares of HD (2.0% of my income portfolio).