The retailing world isn't a favorite among income investors. Tough selling conditions -- such as low profit margins and constantly shifting consumer preferences -- make it harder for companies in the industry to establish the type of consistent earnings growth that dividend fans target.
But some retailers have made it to the ranks of top dividend stocks, as evidenced by significant payouts that have grown through multiple recessions.
Below, we'll highlight three of the most attractive of these winners. Read on to see why Target (TGT 1.33%), Home Depot (HD 2.61%), and TJX Companies (TJX 0.20%) deserve a spot on your income-investing watch list.
1. Home Depot
Home Depot's dividend might not jump out as an option for many income investors since its track record of consistent annual growth is just over 10 years long. Rival retailer Lowe's (LOW 2.04%), in contrast, is a Dividend Aristocrat with over 25 consecutive years of raises. Dig a bit deeper, though, and you'll find plenty to like about the home improvement leader as a dividend stock.
Yes, Home Depot paused its hikes in 2006 through 2009, during the worst years of the financial crisis. But since then it has been far more generous with its raises. The payout has jumped over 500% since 2010 compared to Lowe's 400% boost. That gap has been funded by a range of impressive financial metrics including higher profitability, faster sales growth, and stronger efficiency. Home Depot also targets returning 55% of earnings to its shareholders each year, while Lowe's aims to deliver just 35% of its profits as dividends.
That more aggressive posture has also helped support a higher yield (over 2%), even though Home Depot shares have outperformed Lowe's over the last decade.
Target and Walmart (WMT 0.19%) have each struck gold by successfully shifting their operating model toward multichannel selling in the past few years. But Target looks like the better dividend stock today.
The retailer sells many consumer staple products like groceries, which Walmart markets to great success. But its home furnishings and apparel offerings have allowed Target to move higher up the value chain and generate more robust profit margins. That success has been amplified by Target's recent focus on ultra-fast fulfillment methods like same-day delivery. Consumers are embracing these options and giving Target market-share gains while boosting its earnings.
Given those financial differences, it's no surprise that Target's dividend is higher in terms of yield -- and has been growing more quickly in recent years. The latest 3% increase, compared to Walmart's 2% boost, shows why income investors might prefer this stock to the industry giant's.
3. TJX Companies
TJX Companies recently cut its dividend, which normally would take a stock right off any list of potential income investments. But there are some good reasons to give the off-price retailer a pass on this score.
Its TJ Maxx, Marshalls, and Home Goods stores were all closed for much of the fiscal second quarter, which ensured that sales plunged by over 50% during the worst-impact days of the COVID-19 pandemic. This unprecedented selling environment convinced management to take the unusual step of skipping dividend payments over the last few quarters.
Its stores are open and welcoming guests now, though, so it shouldn't be long before TJX Companies returns to its normal cash-generating ways. Disruption in the retailing industry tends to help the company accumulate better inventory, too. And CEO Ernie Herrman and his team have proven their ability to maximize that advantage, with annual sales rising 33% in the four years ended in 2019.
Depending on how the rest of 2020 plays out, TJX Companies could end up just shy of qualifying for Dividend Aristocrat status, having raised its dividend in 24 consecutive years before COVID-19 struck the industry. But income investors might want to look past that blemish and focus on the chain's financial and operating metrics that make it an attractive long-term bet today.