This S&P 500 Stock Pays a 2.67% Dividend Yield and Has Increased Its Payout in 17 Straight Years. Here's Why None of This Matters to Investors as Much as the Federal Reserve and Kevin Warsh.

Home Depot (NYSE: HD) just reported financial results for its fiscal second quarter (ended Aug. 2). Revenue of $47.9 billion and adjusted diluted earnings per share of $4.92 both came in ahead of Wall Street analyst expectations. Shares were up following the announcement, even though the management team kept guidance unchanged.

The retail stock has been disappointing in the past five years, trading up just 7% during that time (as of Aug. 19). However, it does a fantastic job of returning capital to shareholders. Home Depot currently pays a dividend yield of 2.67%. And it has raised the quarterly payout in 17 straight years, with a dividend going to shareholders in 157 consecutive quarters.

Passive-income investors can rejoice. However, the dividend doesn't matter nearly as much as the Federal Reserve and Kevin Warsh. Home Depot's success depends on favorable macroeconomic conditions.

Here's what investors must know about the industry-leading home improvement chain.

Image source: The Motley Fool.

Blame the macroeconomic environment

During the second quarter, Home Depot revealed that same-store sales (SSS) increased by 1.7%, marking the fastest growth rate in almost four years. The reported figure still isn't anything to write home about. This important metric has been under immense pressure in recent years, even turning negative in fiscal 2023 and fiscal 2024.

Blame the macro environment. Inflationary pressures are forcing the Federal Reserve's hand, as it recently kept the fed funds rate unchanged. The Personal Consumption Expenditures price index, which is the central bank's preferred inflation gauge, is well above the long-run 2% target. Fed Chair Kevin Warsh has signaled to the market that he intends to contain inflation. Companies whose success depends on a more accommodative environment will have to wait for better days.

Home Depot will continue to feel the negative impacts. Housing turnover is low, and mortgage rates are high. This setup discourages more spending activity on upgrades and renovations. These are sizable purchasing decisions, so it makes sense that people are being more discerning, especially when economic uncertainty is elevated.

Until inflation gets under control, which may or may not take some time, it's not easy to be bullish on Home Depot's growth prospects. Interest rates need to come down, and activity in the housing market must pick back up. According to consensus analyst estimates, the company's revenue in fiscal 2028 will be only 12.4% higher than 2025's $164.7 billion total. This is a muted outlook.

Bulls get paid to test their patience

That being said, this is a competitively advantaged business. It's the clear leader in what management estimates to be a massive $1.2 trillion industry. This supports its brand recognition. What's more, a significant revenue base affords Home Depot the ability to invest in new store openings, supply chain and omnichannel capabilities, inventory availability, and labor force.

But its 14% market share underscores the opportunity in front of it to grow revenue at the expense of smaller rivals. One of the most powerful long-term tailwinds for this business is the aging housing stock, as older homes require more upkeep. What's more, there are trillions of dollars in untapped equity due to notable housing appreciation in the U.S. in recent years. This indicates pent-up demand.

Home Depot is a high-quality company whose dividend faces virtually no risk of being disrupted. Profitability is no issue. Despite facing macro headwinds, it still posted $4.8 billion in net income in the latest fiscal quarter. And analysts believe it will generate $16.9 billion in free cash flow this fiscal year. That's materially higher than what its dividend bill will be.

Home Depot won't do much to attract growth-minded investors. However, it is a solid dividend stock. Investors who remain bullish can at least earn a healthy income stream as they wait for the company's financial performance to improve. It's easier to be patient when you're getting paid to do so.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.