After a year of strong market returns, it's difficult to find a quality dividend stock trading at a compelling valuation. Case in point, the average dividend yield of stocks in the S&P 500 is now 1.8% -- down from 2.2% this time last year. 

However, a close look still reveals some attractive income-generating stocks. One worth highlighting is grocery store Kroger (NYSE:KR). Not only does the company pay a meaningful dividend yield, but same-store sales are rising meaningfully as the company's multiyear transformation plan (called "Restock Kroger") is repositioning the business to thrive in an evolving retail landscape.

A woman pushing a shopping cart full of vegetables in a grocery store

Image source: Getty Images.

A robust dividend

In both 2018 and 2019, Kroger has made it clear to shareholders that it is prioritizing its dividend, boosting the payout by a double-digit percentage both years. In the summer of 2018, the company's board authorized a 12% dividend increase -- an acceleration from a 4% increase in 2017. In 2019, the company's dividend growth rate accelerated once again; Kroger announced a 14% dividend hike.

"Kroger's 14 percent dividend increase underscores our Board of Director's confidence in the momentum we are building in the second year of Restock Kroger and our ability to deliver strong free cash flow," said Kroger CEO Rodney McMullen in a press release about the dividend increase. 

Kroger currently pays out a quarterly dividend of $0.16, or $0.64 annually. This gives Kroger stock a 2.2% dividend yield.

Importantly, Kroger is well positioned for continued dividend growth in the coming years. Not only has same-store sales growth been accelerating (and management's guidance implies further acceleration in 2020), but the company also has a low payout ratio. Kroger is currently paying out only 29% of its trailing-12-month net income in dividends, leaving plenty of room for dividend growth in the coming years.

A compelling valuation

Beyond Kroger's dividend, another reason to bet on the stock for the long haul is its compelling valuation. Kroger currently trades at less than 15 times trailing-12-month earnings and only 12.4 times analysts' consensus forecast for earnings over the next 12 months.

Further, it's clear that Kroger's transformation plan is paying off. The company has reduced its debt by $1.5 billion over the prior four quarters thanks to strong free cash flow. Kroger's $1.4 billion in trailing-12-month free cash flow has been helped by the successful implementation of Restock Kroger cost savings initiatives. Indeed, the company is on pace to achieve $1 billion in annual cost savings in 2019.

Kroger's attractive valuation viewed together with its expected 30% year-over-year growth in digital sales in 2019 and management's guidance for same-store sales to rise 2.25% or greater in 2020 makes the stock look like a great long-term bet, particularly for investors looking for robust dividend income.