The best dividend stocks can have a tough time keeping pace with a rip-roaring, growth-fueled bull market. After all, the whole idea of a dividend is to pass along a portion of profits directly to shareholders instead of reinvesting them in the business.
Naturally, dividend-paying companies tend to be lower growth. But Walmart (WMT 0.48%), Target (TGT -2.43%), Procter & Gamble (PG 0.23%), and Emerson Electric (EMR -1.91%) have not only paid and raised their dividends for at least 50 consecutive years -- making them Dividend Kings -- but all four stocks are also beating the S&P 500 and Nasdaq Composite indexes year to date.
Here's what's going right for each company and whether they are worth buying now.
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1. Walmart
Walmart is up 23% year to date. More specifically, the stock has gained 17.2% since the company announced its 3-for-1 stock split on Jan. 30, followed by its 9% dividend increase on Feb. 20.
Walmart has been a relatively steady performer in recent years. In 2022, the stock lost only 2% compared to an over 19% decline in the S&P 500. Walmart then gained 11.2% in 2023. The main reason behind its consistent strength is that Walmart almost always meets or exceeds investor expectations. And the rare times when it doesn't, it has handled challenges better than its peers.
Walmart did a good job pivoting to the needs of consumers who were stuck at home when it launched Walmart+ in September 2020. It navigated supply chain challenges well and achieved good results despite inventory inefficiencies. Forecasting demand is everything for a retailer like Walmart. Underestimate it, and there's money left on the table. But overestimate it, and that can lead to unwanted sales and even losses.
In sum, Walmart never made a big mistake. And now, it is on track to deliver record earnings in fiscal 2025. With a low payout ratio of just 40% and earnings growth on the horizon, I could see Walmart making meaningful dividend raises in the years to come, which should help improve its 1.4% yield.
2. Target
Up 46% since Nov. 1 of last year, Target has been a rapid and successful turnaround play. Unlike Walmart, Target made several major mistakes in 2022 and 2023. It mismanaged its supply chain, overstocked its inventory, and then was pressured to slash prices to move products off the shelves. This messy strategy took a sledgehammer to its margins. At its worst, Target's operating margin was just 3.5%. For context, it usually hovers around 6%.
Every percentage point matters when a business is making six cents on the dollar in operating income for every dollar in sales. So with fears of a recession and consumers pulling back on discretionary goods, Target stock naturally took a big hit in 2023. There were also negative responses to Target's branding decisions, which pushed some customers away during a vulnerable time in the business.
Target's trailing-12-month operating margin has recovered to 5.3% in a short amount of time. The stock price has also shot up in lockstep with the margin improvement.
With a 2.7% dividend yield, Target yields nearly double Walmart, but it has a more discretionary product mix -- making it more vulnerable during an economic downturn.
3. Procter & Gamble
Like Walmart, P&G has seen a rally in its stock price thanks to improving fundamentals. Today, P&G is seen as one of the safest dividend stocks on the market. But the company is actually a turnaround play that has been over a decade in the making.
As you can see in the chart, P&G's revenue is just now returning to levels not seen since the early 2010s. But its margins are far higher now than they were back then. P&G's revenue fell because it cut its brand count from 170 to 65 and its product categories from 16 to 10 between fiscal 2015 and fiscal 2017.
This strategy hurt P&G in the short term but was the right long-term move. P&G focused on its best and highest-margin brands, and used excess capital to repurchase its stock and grow the dividend.
P&G's stock price has outpaced its earnings growth, which has led to a valuation expansion as the company's price-to-earnings ratio is now 27.4 -- which is high for a stodgy low-growth dividend stock. P&G is yet another example of the market's willingness to pay up for quality.
4. Emerson Electric
With over 55 brands spanning numerous industries, Emerson Electric is an industrial conglomerate mainly engaged in business-to-business sales. So, you may be less familiar with it than Walmart, Target, and P&G.
The company is admittedly complex, with a product suite spanning actuators, asset performance management, control and safety systems, electrical and lighting, industrial and factor automation, measurement instrumentation, professional tools and vacuums, regulators, test and measurement, valves, welding, assembly, and cleaning.
The stock went practically nowhere in the five-year period between 2014 and 2018. So Emerson restructured the company with some major sales and acquisitions to capitalize on its highest-conviction theme -- automation.
Emerson has a long potential runway for earnings growth -- and, in turn, dividend growth -- driven by the accelerated adoption of automation in manufacturing. The optimism is reflected in Emerson analyst consensus estimates, which call for 2024 earnings per share (EPS) of $5.47 followed by $6.02 EPS in 2025.
Despite hovering around an all-time high, Emerson would have less than a 21 P/E ratio if it hits the 2024 consensus estimate -- which is a testament to the company's growth and how beaten down the stock was.
A true widespread rally
When a few sectors are making or breaking a rally, it can leave the market vulnerable to a correction. But over the last few months, sectors outside of growth, like consumer staples and utilities, have hit 52-week highs while industrials, financials, and materials are hovering around 52-week highs.
Strong performances by rock-solid Dividend Kings indicate the market rally is broadening and becoming stronger. The greatest risk is that valuations are on the cusp of getting overextended. But if companies like Walmart or Emerson Electric kick into a new growth gear, that could fuel earnings growth and support a rising stock price.
The key takeaway is that earnings growth has been good, and businesses are doing well across sectors. The stock market is higher for mostly good reasons, and that's great news for growth, income, and value investors alike.
