Thanks in no small part to Amazon, the retail world has been undergoing rapid changes in the last decade. And the pandemic sealed the deal: E-commerce in all its many forms is here to stay.

But the industry isn't just about all-out growth. There are plenty of retailers adapting their business models for the future and simultaneously paying out dividends. Three top names for 2021 are Target (TGT -1.20%), Best Buy (BBY -2.02%), and The TJX Companies (TJX 0.14%). Let's find out a bit more about these three top retail dividend stocks and why they might be strong investment options in 2021.

1. Target: Doubling down on flexible order fulfillment and in-house brands

Target is a Dividend Aristocrat. The big-box store has steadily increased its shareholder payout for nearly five decades. And after spending a few billion a year since 2016 to update its operation for the new digital era, Target is doubling down on what it does best and setting itself up for another decade of steady growth. 

A mini shopping cart full of boxes sitting on top of a laptop.

Image source: Getty Images.

During its fourth-quarter 2020 update, Target announced it would be spending about $4 billion a year for the next few years to increase the number of stores that can handle multiple types of order fulfillment -- from in-store shopping to online orders to delivery (via its in-house service Shipt, acquired in 2017). And since virtually all Target orders, even those placed online, are fulfilled by one of its local stores rather than a distribution center, the company sees an opportunity in opening new small-format locations in urban areas and college campuses.  

In addition to doubling down on what made it a success during the pandemic, Target will also continue to increase the number of its own brands. Launching its own labels in high-profit categories like apparel and home furnishings has been a winning strategy for Target. As the department store business model declines, it's increasingly the one-stop shopping experience provided by big-box stores like Target that is winning over those consumer dollars. And with nearly all of America within a few miles of a big red bullseye, Target thinks it can continue to win if it adds more options for shoppers.  

Management said to expect another dividend increase later this year, but even now this is a solid income stock. Shares currently yield 1.5% a year, and free cash flow generated in 2020 ($7.88 billion) handily covered the dividend payout ($1.34 billion). There's plenty of room for this quarterly payday to rise in the next decade.

2. Best Buy: A bet on enduring consumer electronics

Speaking of big-box stores, Best Buy pays an even higher-yielding dividend -- currently at 2.6% a year as of this writing. And while Best Buy doesn't have the longevity Target does, it too is on a tear. It's steadily raised its payout every year since 2010 (after a pause in dividend hikes in 2009 during the Great Recession) and doled out some one-time special dividends along the way too. And after the most recent increase to $0.70 per share per quarter, Best Buy's quarterly dividends paid have increased 400% since 2010.

The result has been a dual compounding effect from a steadily growing stock price and income. In a new era of shopping, Best Buy is positioned well. Consumer electronics are a core category in retail. Case in point: The company's total revenue grew 8% last year, even as the U.S. Census Bureau indicated average electronics store sales fell nearly 15%. Much like Target, Best Buy found success in offering flexible order fulfillment to customers. Some 43% of its domestic sales were online during the busy holiday shopping season, and it expects a similar rate in the year ahead.

Consumer electronics have never been more important as they lie at the center of everyday life -- both for business and personal use. As consumer spending in important categories like smartphones and PCs normalize in 2021, Best Buy is poised to benefit. And work-from-home looks like it's here to stay as well. A top name in this segment, this big-box store should be able to steadily grow for years as technology makes further inroads into the economy. 

And at under seven times trailing 12-month free cash flow, shares look like a real bargain right now. Plus, the dividend last year ate up just 13% of free cash flow generated. Best Buy's run as a top retail stock for income looks safe to me.  

3. TJX Companies: Even treasure hunts can take place online

Apparel was another beat-down segment of the retail industry last year. The U.S. Census Bureau reported a 26% year-over-year decline in clothing and accessories sales in 2020. And since most of its revenue is derived from physical stores, TJX Companies was far from immune to the downturn.  

But the parent of TJ Maxx, HomeGoods, and Marshalls could be in for a big rebound in 2021. At some point, people are going to need some new clothes as they return to work, start socializing, and go on vacation again. Full-year sales fell 23% last year, but the treasure hunt-style shopping experience will start lapping initial effects from COVID-19 this spring. Resilient comparable-store traffic during the pandemic (after stores were able to reopen) shows consumer interest in getting a bargain isn't going away anytime soon.  

Additionally, in this era of e-commerce, many apparel makers are forging direct relationships with customers online. TJX is a reliable tool for these makers to manage inventory -- and gives TJX a steady supply of merchandise it can sell on the cheap. And though its revolving door of product is difficult to manage online, the company has ramped up its technological efforts here. A similar digital bargain-hunting experience is now available and helping TJX adapt to the times.  

Even after a tough go of things in 2020, TJX is reasonably priced at 20 times trailing 12-month free cash flow. A 1.6% annual dividend (including a 13% increase to a year ago declared during the Q4 update) sweetens the deal. Plus, even in a down year, free cash flow will handily cover this reinvigorated dividend payment. TJX remains a solid bet and great income stock as the world starts to recover from the pandemic.