Dividend stocks can be a valuable income source for investors, especially those in retirement. Beyond providing income, companies with a history of increasing dividends tend to outperform the overall stock market.
With that in mind, here are three dividend stocks worth adding to your watch list.
1. Lowe's
Lowe's (LOW 0.22%), a leading home improvement retailer, is a Dividend Aristocrat, having raised its dividend for at least 25 consecutive years, and has paid a dividend every quarter since becoming a publicly traded company in 1961. Its current quarterly dividend is $1.05 per share, which yields about 2%.
A key metric for any dividend stock is its payout ratio (annual dividend payments divided by annual earnings) to ensure the company can afford to maintain and potentially raise its payout. Generally, any payout ratio higher than 75% should give an investor cause for concern. So, with a payout ratio of about 25%, the company should be able to continue to raise its dividend for years to come.
Despite its dividend history and overall return, rising interest rates could create some anxiety for shareholders. But CEO Marvin Ellison recently said, "We've seen no material trade down from our customers" due to rising interest rates.
Another factor in Lowe's favor is the aging inventory of American houses. At least 50% of United States household units are more than 40 years old, according to the 2020 U.S. Census, so a repair could likely be around the corner for many Americans. As a major player in the home improvement business, its sales should continue to grow.
2. Target
Target (TGT 0.70%) became a Dividend King, an S&P 500 company that has paid and raised its dividend annually for at least 50 consecutive years, in 2021.
The company recently announced a 20% raise to its quarterly dividend from $0.90 to $1.08 per common share. As a result, Target's dividend yield is about 2.4%, its highest point over the past two years.
Beyond Target's impressive dividend streak, the retailer returns value to shareholders with an aggressive share repurchase program. From July 2021 to June 2022, Target lowered its diluted outstanding shares by 7.1%, from roughly 503 million to 468 million.
Target also recently entered into an Accelerated Share Repurchase arrangement for up to $2.75 billion of common stock in addition to its $12.3 billion remaining share-repurchase program. By drastically lowering its outstanding share count, Target aims for its remaining shares to be worth more.
Target is facing challenges, namely a growing inventory of bulky items that CEO Brian Cornell admitted it didn't anticipate as consumers shifted their spending away from goods and services. As a result, the company faced elevated costs to store the excess inventory and unload them.
Still, Target's stock looks underpriced compared to its historical price-to-earnings (P/E) ratio. It traded at a P/E of about 15 as of this writing, close to a two-year low, meaning the bellwether dividend-paying stock looks to be on sale.
TGT PE ratio. Data by YCharts.
3. Paramount Global
A newly favorite Warren Buffett stock, Paramount Global (PARA.A 0.14%) (PARA 3.64%), pays a quarterly dividend of $0.24, equating to a dividend yield of 3.15%. The company's film division, Paramount Pictures, has shined in 2022 with the highest-grossing movie of the year, Top Gun: Maverick, raking in over $1.37 billion to date at the global box office.
Paramount does have some debt concerns, with $15.7 billion in long-term debt on its balance sheet. But it has $4 billion in cash and cash equivalents and a relatively low dividend payout ratio of about 20%, so its dividend shouldn't be in danger of being cut anytime soon.
While Paramount isn't Netflix when it comes to streaming, its direct-to-consumer (DTC) segment is growing nicely. The company's most recent quarter saw year-over-year growth of global subscribers from 42 million to 64 million, and revenue up 56% from $767 million to $1.19 billion in the DTC segment.
Unlike Lowe's and Target, Paramount hasn't consistently raised its quarterly dividend, the last time being in 2019. But with movie theaters reopening and its DTC segment growing, the entertainment company could reward its shareholders with a raise sometime in the near future.
