Stock Market Plunge: Why I'm Loading Up on These 2 Stocks

With the S&P 500 up 3% so far this year, investors have begun to see some hopeful signs of recovery from 2022’s sharp losses. But those gains have come in fits and starts — and plenty of uncertainty remains. The Conference Board, a nonprofit think tank, puts the probability of a U.S. recession at 99% within the next 12 months, so investors could be in for another bumpy ride this year.

Quality dividend stocks could help investors weather any further storm on the horizon for stocks. Here are two superb choices with tremendous dividend growth potential to consider now.

Two people check their investments.

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1. Lowe’s: A major player in a trillion-dollar industry

Operating as the second-biggest player in the $1 trillion home improvement retail industry, Lowe’s Companies (LOW -1.16%) has benefited from the emphasis placed on homeownership in North America. It’s anticipated that soaring mortgage rates and elevated home values will result in a meaningful slowdown in the housing market. 

But the good news for Lowe’s is that demographics remain on its side; 72% of the nearly 70 million individuals living in the U.S. who are members of Generation Z intend to buy a home in less than six years. Beyond the near term, this bodes well for the company.

That’s why analysts believe that Lowe’s non-GAAP (generally accepted accounting principles) adjusted diluted earnings per share (EPS) will compound at 8.8% annually over the next five years. For context, that’s about double the home improvement retail industry average earnings growth forecast of 4.4%. 

Income investors will appreciate Lowe’s 2.1% dividend yield, which is significantly more than the S&P 500 index’s 1.7% yield. And because the company’s dividend payout ratio was modest at less than 27% in its previous fiscal year, Lowe’s appears poised to continue delivering strong dividend growth to shareholders in the years ahead. 

The stock is trading at a forward price-to-earnings (P/E) ratio of 13.5, which is well below the home improvement retail industry average forward P/E ratio of 15.9. Given the company’s superior growth prospects over industry peers, Lowe’s arguably deserves a greater valuation multiple. That’s probably why analysts have an average 12-month price target of $229, which represents a 15% upside from the current $199 share price. 

2. Tractor Supply: The leader in a quickly growing niche

Worker burnout following the COVID-19 pandemic has played a major factor in a mass migration away from urban areas and into rural areas over the last few years. A full two-thirds (66%) of Americans polled in a recent survey said that they would consider moving to a rural home or a subdivision if telecommuting is possible. 

With over 2,200 stores in the U.S., Tractor Supply (TSCO -1.22%) has been and should continue to be the biggest beneficiary of this trend. This is because with more Americans embracing the rural lifestyle, the demand for the company’s products has especially shot up in the last few years.

That explains why analysts believe the company’s diluted EPS will grow by 10.1% annually through the next five years. Putting this into perspective, that is slightly above the specialty retail industry average earnings growth outlook of 9.4%. 

Tractor Supply’s 1.8% dividend yield is a bit higher than the S&P 500 index’s yield. And considering that the company’s dividend payout ratio will be less than 40% for the current fiscal year, this dividend has tons of room for future growth. 

Tractor Supply’s forward P/E ratio of 20 is much more than the specialty retail industry average forward P/E ratio of 16. But considering its massive tailwinds and remarkable track record of dividend growth, the stock is worthy of such a premium valuation. 

Kody Kester has positions in Lowe’s Companies and Tractor Supply. The Motley Fool recommends Lowe’s Companies and Tractor Supply. The Motley Fool has a disclosure policy.