If you're looking for reliable, growing dividend income, Tractor Supply (TSCO 3.26%) is perhaps my best idea. Indeed, I'm so bullish on the long-term for this company that my optimism persists even as the company could soon report same-store sales growth below consensus estimates. One analyst recently downgraded the stock's 12-month price target, citing soft credit card data during Q2 as a result of macroeconomic pressure on discretionary spending and unfavorable weather patterns for the period. With this said, the Truist analyst's revised price target of $275 notably still sits far above the rural lifestyle retailer's stock price at the time of this writing.
Here's a closer look at why investors looking for a good dividend stock may want to add Tractor Supply to their portfolios.
A refreshingly conservative valuation
This market's surge higher this year has been great for many investors' portfolios. But it makes it difficult for investors looking to invest new capital. Many stocks now trade at very high valuations. Consider that the average price-to-earnings ratio of stocks in the Nasdaq 100 is now 31. Tractor Supply's valuation contrasts this, allowing investors to bring some conservative pricing into their portfolios. The rural lifestyle retailer's price-to-earnings ratio is currently sitting just below 23.
This is a fair (if not great) price to pay for a market leader with rapid growth in stores, positive comparable store sales growth rates, and a product mix heavily slanted toward needs-based, demand-driven products like livestock feed, pet food, lubricants, and pest control. Therefore, not only is Tractor Supply growing nicely but the types of products it sells are likely to do well in both good and uncertain economies.
Highlighting management's confidence in its business despite the current pressures the consumer is facing, the company recently guided for full-year 2023 comparable store sales to increase at a rate between 3.5% and 5.5%.
A meaningful dividend yield
Dividend investors, of course, will be happy to learn that Tractor Supply's conservative valuation means that its dividend yield currently exceeds 1.8%. This is above the S&P 500's dividend yield of about 1.6% and far higher than the Nasdaq 100's dividend yield of 0.7%.
Importantly, the quarterly dividend payment of $1.03 the company pays to shareholders will likely increase substantially in the coming years. This is because the retailer currently pays out only about 39% of its earnings in dividends. With earnings-per-share growth likely to continue in the coming years, and in light of Tractor Supply's low payout ratio, the company will likely increase its dividend annually at rates somewhere between high single digits and mid-teen digit rates for the foreseeable future.
A robust share repurchase program
Finally, investors should note that management's confidence in its business has led it to return cash to shareholders indirectly, too. It's doing this in the form of share repurchases. Of the $310.6 million Tractor Supply returned to shareholders during Q1, about $113 million was paid in dividends, and an impressive $197.2 million was used to buy back stock.
Overall, there's much to like about Tractor Supply stock -- particularly as an idea for a meaningful, growing income stream. While investors should do their own due diligence before they buy shares, the well-rounded company is at least worth further consideration.
