Why You Should Look At Home Depot Inc (HD), GameStop Corp. (GME), and Costco Wholesale Corporation (COST)?

The retail sector has been on a downtrend for the better part of the year as the threat posed by e-commerce continues to elicit fear among investors. Declining share price remains the order of the day as investors remain wary of changing consumer-trading patterns. Amidst the turmoil, Home Depot Inc (NYSE:HD), GameStop Corp. (NYSE:GME) and Costco Wholesale Corporation (NASDAQ:COST) are already making a case for themselves as a must pick stocks, for income investors.

Home Depot’s Robust Earnings Growth

If there is a brick and mortar store that remains solid as ever amidst the e-commerce wave, it has to be Home Depot Inc (NYSE:HD). The home improvement sector is the retailer’s bread and butter and given its dominance in the space; it has been able to shrug off competition from rivals.

If the latest earnings report is anything to go by, then Home Depot is in for an impressive ride this year. A 19% increase in income in the first quarter, capped a fifth straight estimate thumping by the retailer. This should be good news for income investors given that the company’s dividend yield is directly related to earnings.

Unlike other retailers, Home Depot is fond of channeling up to 50% of its profits to shareholders in the form of dividends. Earnings growth is no longer an issue, which means investors stand to walk away with lofty payouts going forward.

Expected Earnings Growth

Buoyed by the performance in the first quarter, the executive team has already updated full year guidance, which they expect to jump 15% to $6.27 a share. Given the rate at which earnings are growing, the retailer may double its dividend this year or early next year.

Home Depot Inc (NYSE:HD) is targeting an operating margin of 14.5% and annual revenue of $100 billion by 2018. By attacking opportunities in e-commerce as well as the professional contractor segment, the retailer believes it can achieve this feat. Growth on this front should have an impact on earnings, which should in return, result in an increase in dividend payouts.

GameStop’s Expansion Drive Paying Off

GameStop Corp. (NYSE:GME) prospects in the gaming industry have come under pressure in the recent past as it continues to struggle in an increasingly online world. The retailer’s core business of selling previously owned video game is no longer generating revenues it used to, digital downloading having taken over.

However, the retailer is doing all it can to offset the weaknesses in its core business. A shift of focus to consumer electronics, mobile phone services, and gaming collectibles is helping offset loss of revenues in other segments.

Impressive Dividend Payout

The transition is already paying up GameStop Corp. (NYSE:GME) having posted record revenues of $400 million last year. For the current year, the retailer expects revenues of $423 million. Despite the size of its total revenue, the retailer is giving other retailers a run for their money when it comes to its dividend offering.

A dividend of $1.44 a share further affirms why GameStop Corp. (NYSE:GME) is an exciting pick when it comes to payouts. Having generated $3.80 a share last year, the gaming retailer remains bullish of generating $4 a share this year, which could see it boost its dividend yield.

Costco Surprise Dividend Payouts

Last year, Costco Wholesale Corporation (NASDAQ:COST) surprised shareholders with a special dividend of $5 a share. The payout was in addition to the company’s regular $0.36 a share quarterly payout. The last time the warehouse retailer issued such a lofty payout was in $2012 when it rewarded investors with a $7 a share.

If past payments are anything to go by then Costco Wholesale Corporation (NASDAQ:COST) remains one of the best stocks when it comes to dividend payments. The retailer has plenty of resources to fund such payouts given that it is generating well over $2 billion in net income annually.

Another surprise lump payment could be in the offing going forward given that the retailers key profit drivers are as solid as ever.

Bottom Line

There is no doubt that Home Depot Inc (NYSE:HD), GameStop Corp. (NYSE:GME) and Costco Wholesale Corporation (NASDAQ:COST) have been pummeled by weakening operating trends in their areas of operation. However, their lucrative dividend yields make them exciting picks in the retail sector.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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