The retail sector has been tough to invest in over the past year, as many retailers struggled to attract brick-and-mortar visitors in the age of Amazon (NASDAQ:AMZN). But amid the carnage, income investors can still find some reliable dividend plays. Today we'll take a look at three stocks that fit the bill -- Wal-Mart (NYSE:WMT), TJX Companies (NYSE:TJX), and American Eagle Outfitters (NYSE:AEO).


Wal-Mart is arguably the only big box retailer that can directly counter Amazon. Wal-Mart is turning its thousands of stores into fulfillment centers for online orders, and it offers curbside pickup for customers who don't want to wait for their orders. It's matching Amazon's prices and shipping fees, expanding its digital ecosystem with more efficient apps and payment systems, and countering big events like Prime Day with its own online sales.

The interior of a Wal-Mart store.

Source: Wal-Mart.

It'll be a bruising battle, but I believe Wal-Mart has the scale to hold its ground. Wal-Mart's comps rose 1.4% in the U.S. last quarter, its e-commerce revenue surged 63%, and it posted its first quarter of annual earnings growth in over two years. Analysts expect its revenue and earnings to respectively rise 2% and 1% this year.

Wal-Mart pays a forward dividend yield of 2.7%, and it's raised that payout annually for over four decades. It spent just 46% of its earnings and 30% of its free cash flow on those payments over the past 12 months, so it has plenty of room for future hikes. The stock also trades at a reasonable 17 times earnings, which matches the industry average for discount stores.

TJX Companies

As Amazon crushes major retailers, much of their excess inventory gets sold at steep discounts to TJX Companies, the parent company of off-price retailers T.J. Maxx, Marshalls, and HomeGoods. It does this via a network of over 1,000 merchandise buyers, which have relationships with over 18,000 vendors. This scale makes it the go-to company for dumping excess inventory, and helps it negotiate cheaper prices from smaller retailers.

That's why TJX's stores dominate the off-price niche with its treasure troves of brand-name products being sold at discount prices. TJX's comps rose 1% last quarter, and it expects 1% to 2% growth for the full year (which includes an extra week). Analysts expect its revenue and earnings to respectively rise 7% and 10% this year.

TJX pays a forward dividend yield of 1.8%. But it still has plenty of room for growth, since it only spent 30% of its earnings and 26% of its free cash flow on dividends over the past 12 months. It's hiked that dividend annually for two decades. TJX's P/E of 20 is also slightly lower than the industry average of 21 for apparel retailers.

American Eagle Outfitters

Shares of American Eagle Outfitters fell 25% this year, due to sluggish mall traffic, major bankruptcies flooding the market with cheap clothing, and tough competition from e-commerce competitors. However, I believe that sell-off is overdone, since AEO's numbers don't look anywhere as bleak as its decline suggests.

AEO's comps rose 2% during the first quarter, and it anticipates flat growth to a low single-digit decline for the current quarter. Analysts expect 2% sales growth for the full year, but earnings are expected to decline 12% on bigger discounts before a slight recovery next year. That recovery should be supported by stronger denim sales, the expansion of its high-growth Aerie lingerie and activewear brand, buybacks, and strategic store closings.

AEO's Aerie brand.

AEO's Aerie brand. Source: Aerie.

AEO has no debt, and it pays a generous forward yield of 4.3%. It hasn't hiked that dividend since 2013, but it still has plenty of room to do so, since it spent just 46% of its earnings and 54% of its free cash flow on dividends over the past 12 months. AEO also remains cheap at 11 times earnings, which is much lower than the industry average of 21 for apparel retailers.

The key takeaways

Wal-Mart, TJX, and AEO all face near-term headwinds. Wal-Mart's attempts to counter Amazon could dent its bottom line, TJX's mixed first quarter earnings and guidance disappointed some investors, and AEO still needs to weather the ongoing downturn in mall-based apparel retailers. But for now, these three stocks stand out as good dividend plays in a tough sector littered with "Amazon-ed" retailers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.