If you’re looking to build easy wealth, investing in the stock market is a great place to start.
The S&P 500 has a track record of delivering an average of 9% annual returns with dividends reinvested, which will help you build wealth over time. But by investing in individual stocks, you can grow your wealth even faster, if you choose the right stocks.
Keep reading to see two stocks that look well-positioned to build wealth in your portfolio.
1. Home Depot
Home Depot (NYSE: HD) has been one of the best-performing stocks in history. Since its 1981 IPO, the stock is up a whopping 1,777,000%. That means an investment of $1,000 then would now be worth more than $17 million.
Unfortunately, that track record won’t help you much unless you have a time machine, but it’s evidence of the company’s dominance of the home improvement retail sector and its enduring competitive advantages.
Today, Home Depot still looks like an excellent candidate for long-term wealth accumulation. Now looks like a great time to buy the stock, as the housing market is expected to rebound as interest rates come down.
Home Depot competes in a duopoly with Lowe’s. This dynamic has favored both retailers, allowing Home Depot to generate wide operating margins and high returns on invested capital. Even in a challenging retail environment, the company reported an operating margin of 15.3%, an impressive percentage for almost any retailer.
It had a trailing 12-month return on invested capital (ROIC) of 31.9%, which was down from 41.5% in the previous period due to its acquisition of SRS Distribution, but still strong. In other words, the company is well-equipped to earn a strong return on new investments due to its economies of scale, brand advantages, and strength in the omnichannel.
The stock might not seem well-priced now at a price-to-earnings (P/E) ratio of 25, but earnings are suppressed due to the weakness in the housing market. When interest rates fall and demand for home improvement materials rises, Home Depot’s profits could surge along with the stock. Additionally, the company’s 2.5% dividend yield adds a bonus for dividend investors, and you can grow your wealth faster through a dividend reinvestment plan (DRIP).
2. Realty Income
Another real estate-focused dividend stock worth buying if you’re looking to build wealth is Realty Income (NYSE: O).
Realty Income is a real estate investment trust (REIT) that specializes in triple-net leases, meaning its tenants pay for maintenance, insurance, and property taxes. This helps make its cash flow more predictable. Additionally, the company primarily leases its properties to recession-proof retailers like convenience stores and drug stores. For example, Walgreens and 7-Eleven are two of its biggest tenants.
The company now owns more than 15,000 commercial real estate properties, and like Home Depot, it has a long-term track record of outperforming the stock market and delivering reliable growth with 13.5% compound annual total return since 1994. It’s also done it with significantly less volatility than the S&P 500.
The company is a favorite among dividend investors because it pays a monthly dividend and raises it every quarter. Realty Income has declared 649 monthly dividends in a row and raised its dividend over 107 consecutive quarters.
That’s a great recipe to build wealth for any stock, but especially one that’s been able to deliver steady growth the way Realty Income has.
Now also looks like a great time to buy the stock because falling interest rates favor REITs like Realty Income in two ways. First, it will lower its borrowing costs and make it easier to refinance existing debt, saving the company money on interest expense and helping it fund its future growth. Second, lower interest rates make dividend stocks more attractive, as bond investors tend to rotate back into dividend stocks as bond yields decline.
Realty Income now pays a dividend yield of 5.1%, and it already seems to be benefiting from this expectation. The stock is up nearly 20% since early July, as it’s looking more likely that interest rates will soon come down.
The company still has a massive addressable market to penetrate, and it could very well continue delivering steady returns of around 13%, with a high-yield dividend to boot. If you’re looking to build wealth, Realty Income looks like a no-brainer stock to buy.
Should you invest $1,000 in Home Depot right now?
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Realty Income. The Motley Fool recommends Lowe’s Companies. The Motley Fool has a disclosure policy.
2 Stocks That Could Be Easy Wealth Builders was originally published by The Motley Fool
