Consumer stocks have long served as a source of income for dividend investors. The sector claims numerous Dividend Aristocrats and other stocks that have consistently paid dividends for decades.
Additionally, many of these stocks remain well-positioned for new buyers looking to increase dividend income. Target (TGT 0.37%) and Realty Income Trust (O 1.07%) are two such stocks. Let's take a closer look at each one.
Target stock has fallen victim to the recent supply chain crisis, or rather, its reaction to the goods shortages. The retailer over-ordered inventory, which means it will have to sell much of its offerings at considerable discounts to clear the excess goods.
When Target announced an inventory glut in its first-quarter earnings, the stock dropped by 25% in the following trading session. Since that time, it has recovered very little of its lost value.
Despite this setback, business conditions indicate stockholders may have overreacted. Soon after the announcement, Target announced its 51st consecutive yearly dividend increase, hiking the payout by 20%! Shareholders now receive $4.32 per share in annual income, a cash return of about 2.6%.
Target can afford this payout hike since it operates in all 50 states and claims urban, suburban, and rural locations. This means it can offer same-day delivery and curbside pickup, meaning it can match or outperform Amazon on a rapid turnaround.
This and other advantages have helped Target increase its comparable-store sales growth by 3% in the first two quarters of fiscal 2022 compared with last year.
Overall, revenue in the first half of fiscal 2022 came in at $51 billion, rising 4% compared with the same time frame in 2021. But the aforementioned high inventories weighed on the company. Net income for the first two quarters of fiscal 2022 was $1.2 billion, a drop of 70%.
This left the operating margin at just 3.3% so far this year. Still, the company expects a 6% operating margin for the fiscal year, indicating the inventory issues are probably a temporary challenge.
The stock also sells at a reasonable valuation, trading at 19 times earnings. This is lower than Walmart's P/E ratio of 27 or Costco's earnings multiple of 39. That indicates that Target shareholders can benefit from a rising dividend and significant stock price appreciation as the company recovers from its inventory glut.
Realty Income is a real estate investment trust (REIT). The triple net leases it specializes in are single-occupancy properties operating typically under long-term leases. The tenant takes responsibility for taxes, insurance, and maintenance, a factor that means less financial exposure for Realty Income.
Moreover, about 84% of its properties are in the retail sector. It attracts clients such as CVS Health and Dollar General, retailers less affected by e-commerce. Additionally, its 11,400 properties also help it diversify and protect against challenges from tenant defaults. With occupancy at 98.9%, such challenges have not caused any significant concerns.
Also, Realty Income continues to acquire new properties through direct purchase and acquisitions. Last November, it completed its merger with Vereit, which added 3,800 properties.
That business model has helped it become a dividend stalwart, going so far as to trademark the title "The Monthly Dividend Company." As the name implies, it pays shareholders $2.98 per share annually in monthly installments of $0.248 per share. This dividend has also risen for 28 consecutive years and delivers a cash yield of about 4.6%.
It should have no issues covering this dividend. Adjusted funds from operations (AFFO) income, a measure of a REIT's free cash flow, came in at almost $1.2 billion for the first six months of the year. Since distributions on common shares cost Realty Income $884 million during this period, it should not only cover its payout but also leave room for the continued dividend hikes.
That payout also contributes significantly to its overall returns. Though Realty Income stock has fallen 3% over the past 12 months, it has earned an average return of 15.5% since it began trading in 1994. In comparison, the S&P 500 gained about 10% over that time frame.
Finally, investors should take note of its valuation. If its six-month AFFO income of $1.94 per share is extrapolated over 12 months, the stock sells for about 16 times adjusted funds from operations. Considering its returns, that's a low price to pay for what looks like a no-brainer dividend stock.