When it comes to income and growth in stocks, investors generally have to choose between the two.
Reliable dividend stocks tend to be mature companies with steady profit streams that are focused on returning cash to investors rather than on growing the core business. Companies like Altria, AT&T, and Coca-Cola are good examples. Growth stocks, on the other hand, tend to prioritize reinvesting cash flow in growth opportunities rather than paying dividends and believe they can deliver greater returns to investors that way. Tech companies like Facebook and Amazon offer a good example of this business model.
Image source: Target.
If you're looking for stocks that offer both growth and income, it's hard to beat Target (TGT -0.36%), the big-box retailer that's become one of the top online retailers in the country thanks to years of investing in omnichannel infrastructure. Keep reading to see why Target is a standout as both a dividend stock and a growth stock.
Target the dividend stock
Target is one of just 65 Dividend Aristocrats, or S&P 500 stocks that have raised their dividend every year for at least 25 years. The retailer has lifted its quarterly payout every year since 1971 and today offers a dividend yield of 1.4% since its recent generous payout hike. Last month, the company raised its quarterly payout by 32% to $0.90, a reflection of the success it's had since the pandemic started.
CFO Michael Fiddelke explained the company's approach to dividends last month, saying, "The dividend increase we're announcing today reflects our ongoing commitment to disciplined capital deployment, with priorities that have remained consistent for decades: We first look to invest fully in our business, in projects that meet our strategic and financial criteria. We then look to support our dividend and build on our record of increasing the annual dividend, which we've maintained for nearly 50 years. And finally, over time, we look to return any other excess cash through share repurchases, within the limits of our strong, middle-A credit ratings."
Despite the stock's price more than tripling over the last three years, Target still trades at a very reasonable price-to-earnings ratio of 20, and its payout ratio is just 30% after the dividend hike. That means the company has plenty of room to raise its dividend, which should reassure investors that Target isn't going to lose its Dividend Aristocrat status anytime soon.
Target the growth stock
What's most impressive about Target is that it offers a reliable dividend track record with promising growth prospects. In 2020, Target posted comparable sales growth of 20%. That boom was largely driven by the pandemic as consumers turned to retailers like Target for groceries and other essentials. However, Target posted even stronger sales growth than peers like Walmart and Costco because of the company's investments in same-day fulfillment infrastructure like Drive Up and same-day delivery with Shipt. Those services have helped it win millions of new customers during the pandemic and deliver superior margins, as its e-commerce sales are largely handled by stores, unlike Walmart or Amazon, so the boom has driven growth on both the top and bottom lines. The company's investments in owned brands have also helped buff up its margins and improved customer loyalty as customers come to Target to shop for brands that can be found only there.
Looking ahead, though Target is up against difficult comparisons from a year ago, the long-term growth picture still looks strong. The company is opening new small-format stores to increase reach and provide more pickup and delivery points for its omnichannel strategy. It's also plowing the pandemic windfall back into the business by improving its supply chain, product selection, and same-day fulfillment infrastructure.
As a unique brand in the retail industry, offering a broad product range and with stores spread across the country, Target is well-positioned to capitalize on the aftermath of the pandemic, especially as competitors like department stores and mall-based chains are still ailing from the crisis.
For dividend investors, Target offers both dividend growth and a reliable quarterly check. Additionally, the company's momentum and execution bodes well for the continued growth of the stock and the dividend, and its low valuation means Target looks like a good candidate to outperform the market.
While there's no such thing as a sure thing in investing, Target looks like a great choice for investors looking for growth, value, and income.
