Retail giant Target Corporation (NYSE:) is among an elite group of stocks called Dividend Kings, which are companies that have raised their dividends for at least 50 straight years. There are only 53 stocks on U.S. markets that qualify as Dividend Kings.
This year marked the 52nd consecutive year that Target has raised its dividend, bumping its quarterly dividend up to $1.12 per share in the third quarter, from $1.10 the previous quarter.
While its streak is not the longest — that would be American States Water Company (NYSE:), a utility stock, at 69 years — Target is the best buy among Dividend Kings right now for a few reasons.
What is a Dividend King?
Dividends are payments made to shareholders, usually every quarter, out of excess cash the company generated through earnings. Not all companies pay dividends, but they are typically a staple among older, more established companies, to add value for shareholders.
Young, fast-growing technology and growth companies don’t usually offer dividends because their excess cash goes into investments in new technologies and infrastructure that help the company grow. Older, more established companies typically don’t need to ramp up massive investments in their growth, so they give it back to shareholders via dividends.
Of course, distributing a dividend assumes the company is well run, efficient and growing — otherwise, it would not be able to provide those dividends.
But when a company has done it for 50 years or more, that speaks to the long-term success and stability of a company. The fact that it has safely generated enough cash and earnings to be able to reward shareholders with higher dividends, year after year, through recessions, bear markets, and all sorts of economic cycles, just shows how steady and reliable a company is. That would describe Target.
Why Target is a great Dividend King
The great thing about dividends is they provide income no matter what the stock price does. Thus, they are particularly coveted during corrections or bear markets, because while the stock may have a negative return, investors will still get that dividend. And if you elect to reinvest the dividend back into the stock, it boosts your total return.
While the Dividend King crown speaks to a stocks long-term reliability, there are other factors that go into assessing a dividend stock — and Target excels in most of them.
Perhaps the most important is the yield, which is the percentage of the company pays out in dividends relative to its stock price. The higher the yield, the more that is paid out in dividends. Target pays out $1.12 per share each quarter at a yield of 2.94%. That is higher than most Dividend Kings, as only 7 of the 53 have higher yields. It also beats the average yield on the S&P 500.
But that is not the only factor. You also have to look at the payout ratio, which is the percentage of earnings that go toward the dividend. When a payout ratio is over, say 60%, that means that the company is probably stretching to justify its dividend raise, meaning they are seeking to maintain the dividend perhaps at the expense of investing in its growth.
Target’s payout ratio is right in the sweet spot at 45%, which means it can comfortably boost its revenue without breaking the bank. It also means that Target is probably not in any jeopardy of suspending or not raising its dividend.
Solid returns and future growth
Investors should also look beyond that dividend to how the company’s stock price has performed over the years.
Target stock has been one of the most consistent performers over the years among Dividend Kings. Year-to-date, Target stock has returned 6% and over the past 12 months it is up 21%. When you add in the reinvested dividend, the total one-year return is 25%.
Longer term, it stands out from the pack. Over the past 10 years, Target stock has an annualized return of 9.5% and an annualized total return of 12.7% — which is in line with the S&P 500 over that stretch.
On top of all these factors, Target stock has among the best anticipated growth rates among Dividend Kings. The stock is currently trading at about $152 per share and the median price target among Wall Street analysts is $180 per share, which suggests that the stock price will increase 18% over the next 12 months.
So, when it comes right down to it, Target has not only one of the best yields among Dividend Kings; it has been one of the best performers and has the highest upside. That’s why Target stock is the best Dividend King stock to buy now.
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