Generating passive income is a worthwhile endeavor. Without passive income, folks have to work for money. With passive income, money works for you. It also gives people the freedom to choose whether they want to continue working or retire from laboring and live off the income their investments generate.
The benefits of earning passive income are indeed too many to list. That said, one of the best ways to generate passive income is through dividend stocks. If your goal is to earn $10,000 in passive income annually, you can do that by purchasing 3,164 shares of Target (TGT -0.54%), the popular department store chain. Let's look at the details and learn about a bonus feature regarding what could happen to this $10,000 in passive income in future years.
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A nearly threefold dividend increase since 2013
Buying 3,164 shares of Target stock will get you $10,000 in passive income, but that's only the beginning. That amount will probably increase over the years. Consider that Target has boosted its dividend per share from $1.32 to $3.16 between 2013 and 2022. That means income investors who purchased enough Target stock for $10,000 in passive income in 2013 are now getting $23,940 annually.
What fuels Target's ability to pay dividends are its robust profits. Target grew its earnings per share in the previous decade at a compound annual rate of 12.7%. The only sustainable source of dividend payments is profit. Therefore, Target's solid earnings growth should be a comfort for investors looking for passive income.
TGT EPS Diluted (Annual) data by YCharts
Moreover, Target management has made prudent capital investments over the past couple of years that have paid off handsomely. The company invested in building a top-class omnichannel shopping experience that its customers love. In addition to the traditional buy-online, ship-to-home option, consumers can pick up their order inside a Target store or wait in the parking lot for an associate to deliver it to their car.
Another metric that highlights the sustainability of Target's dividend payment is its payout ratio. This figure, which measures the percentage of earnings paid out in dividends, stands at 28%. The lower the ratio, the more breathing room a company has to pay its dividends through fluctuations in profitability.
TGT Payout Ratio data by YCharts
A fair price for passive income investors
TGT PE Ratio data by YCharts
Target is selling at a price-to-earnings ratio of 13 and a price-to-sales ratio of 0.7. According to these metrics, The stock is reasonably priced relative to its historical average. Investors looking to build $10,000 in passive income would be paying a fair price to achieve that feat through Target's stock.
Passive income investors have several reasons to feel good about buying Target's stock. Of course, buying 3,164 shares of Target stock will require a hefty sum, $484,092 to be precise. However, it's an excellent option to turn a lump sum payment into a recurring stream of passive income that could last a very long time.
