With stocks pulling back recently and interest rates expected to continue moving higher, now is a great time to hunt for dividend stocks. Yields go up when prices go down, and there are a number of high-yield stocks on sale right now.
The retail sector, in particular, has been hit hard by the macroeconomic environment as consumers have shifted spending to necessities and services like travel, cutting back on the discretionary items that were popular during the benefiting.
However, that has set up an excellent buying opportunity for two top dividend growth stocks in the sector. Keep reading to see what they are.
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1. Target
It's been a rough couple of years for Target (TGT -1.68%). The big-box chain was a big winner during the pandemic as its multi-category format brought shoppers in for groceries and kept them around to sell them discretionary goods. Its same-day fulfillment services like Drive Up also soared as shoppers took advantage of the convenience of easy pickup, allowing them to avoid any potential COVID-19 exposures in the stores.
Since then, however, Target has faced a litany of challenges. Inventory levels spiked last year, weighing on margins. It's been plagued by theft, which the company says will cost it $500 million this year, and consumer demand has shifted away from discretionary goods to necessities like groceries, and services like travel and restaurants.
Target is now trading at its lowest level in three years, down 58% from its peak in 2021, but that has pumped up its dividend yield to 3.9%. However, there are signs that the stock could mount a comeback sooner than some investors might think.
First, Target's margins are expanding as it brings its inventory levels under control. Its operating margin reached 4.8% in the second quarter, and management expects that to improve to 6% next year and beyond 6% in the next three years.
Comparable sales are falling, but that's a reflection of temporary headwinds in the discretionary sector, and the company continues to open new stores, a sign of confidence in its long-term growth strategy.
As a business, Target may be underperforming right now, but that weakness is reflected in the stock price as shares trade at a price-to-earnings (P/E) ratio of just 15. Considering the expected upcoming margin expansion, that looks like a great price for a retailer that still has plenty of growth potential left.
2. Home Depot
Another stock that is testing investors' patience these days is Home Depot (HD -0.77%). Like Target, the home-improvement retailer was a big winner during the pandemic, but more recently its strong performance has cooled off. Rising interest rates have crushed the housing market, and Home Depot's comparable sales and profit have fallen along with it.
In the second quarter, comparable sales fell 2% and earnings per share (EPS) slipped from $5.05 to $4.65. Home Depot's guidance also called for continued headwinds as it sees full-year revenue and comparable sales down 2% to 5% and EPS falling 7% to 13%.
Because of those headwinds, Home Depot stock is now down 27% from its 2021 peak, and the stock offers an appealing 2.7% dividend yield. Even better, Home Depot has a long track record of superior dividend growth, typically raising its quarterly payout by double digits each year. Management is also taking advantage of the sell-off by repurchasing stock as it has reduced shares outstanding by 2.1% over the last year.
Additionally, Home Depot essentially competes in a duopoly with Lowe's, allowing it to deliver superior operating margins for a retailer. While investors should expect the business to face some challenges as mortgage rates remain high, the Federal Reserve sees the benchmark fed funds rate starting to come down next year, which should help support a recovery in the housing market.
Once the housing market starts to normalize, Home Depot should return to outperforming the broad market, especially as the stock is affordably priced at a moderate P/E ratio of 19.
