With the S&P 500 surging higher in 2023, it's becoming difficult to find good dividend-paying companies still trading at attractive valuations. But there are some. For the most part, however, investors will need to look beyond tech to find them. After all, the tech-heavy Nasdaq Composite has soared 25% this year as tech stocks left many other sectors in the dust.
For those willing to venture beyond tech to find a good dividend stock, look no further than rural lifestyle retailer Tractor Supply (TSCO 0.68%). As the market marched higher this year, this company's shares slid nearly 7%. This sell-off is a great buying opportunity for investors looking to own a market-leading company with a fast-growing dividend.
NASDAQ: TSCO
Key Data Points
Why Tractor Supply stock fell this year
It's not surprising that the rural lifestyle retailer's stock has taken a hit this year. Going into the year, management guided for comparable store sales to grow at a rate of between 3.5% and 5.5%. But as the year went on, a combination of challenging weather and a shift in the way consumers are spending money has caused the company to repeatedly lower this outlook. As of late October, management was now guiding for full-year comparable store sales to be flat compared to 2022.
Commenting on the consumer, Tractor Supply chief financial officer Kurt Barton explained in the company's third-quarter earnings call that consumers have been "more judicious and prudent with their spend..." Additionally, there's been an ongoing shift from spending on goods toward services throughout 2023 and spending habits gradually normalize following the pandemic, Barton noted. With Tractor Supply being a retailer and not a service provider, this normalization negatively impacts the company.
Why shares are a buy
But investors shouldn't count out Tractor Supply just because management was overly optimistic about its business in 2023. Zooming out a few years shows that this business is a gem. For instance, though a 0.4% third-quarter comparable sales decline was disappointing, this is on top of comparable store sales growth of 5.7% in the same quarter last year, 13.1% two years ago, and 26.8% in 2020. Talk about some tough comparisons. A cooling-off period in the company's same-store sales growth rate, therefore, can be forgiven.
Meanwhile, this negative investor sentiment toward the stock is giving investors an opportunity to buy shares at a valuation of just 20 times earnings and 18 times forward earnings.
Further, investors get access to a robust, growing dividend. Paying out $1.03 per share every quarter, Tractor Supply's dividend yield currently sits at 2%. This easily beats the average dividend yield for stocks in the S&P 500 of 1.6%. Even more, this dividend has been growing nicely and should continue to grow substantially over the next five years. The company's most recent increase of its dividend was announced in February. Raising its quarterly dividend payout by 12%, this marked the company's 14th consecutive year of dividend growth. Making the case for further dividend growth, Tractor Supply's payout ratio, or the percentage of earnings it is paying out in dividends, stands at just 15% today. With a payout ratio this low, Tractor Supply could grow its dividend even if its earnings didn't increase. But the company likely won't be put in this position; analysts, on average, expect Tractor Supply's earnings per share to grow 6% annually over the next five years.
