Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are among the largest retailers in the world. But which is the best dividend stock?
Target stock outperformed the market and handily beat Walmart stock over the past year after sales and earnings growth picked up following a slump in 2014. WMT stock, on the other hand, is now struggling with tepid growth. It’s also making investments into its e-commerce site and other aspects of its business that will eat into earnings for the next couple of years.
Nevertheless, WMT stock and TGT stock are two solid choices for dividend investors, but which of these two stocks is the better buy?
To answer that question, let’s compare some metrics and see which stock is the winner.
All else being equal, dividend investors will want to choose the stock that has the higher yield. Walmart pays out a dividend of $2.00 a share and yields 2.99%, while Target pays out $2.24 a share and yields 2.76%.
Dividend investors want to know for certain that they are going to keep receiving those dividend checks. Investors should take comfort in knowing that these two stocks have been paying dividends for decades. Walmart and Target have been rewarding shareholders since 1974 and 1967, respectively.
Dividend investors want to see those dividends increasing at a rate that at least keeps up with inflation. WMT stock has increased its dividend every year since it started paying out dividends, while TGT stock has increased its dividend for 44 straight years. During the last 10 years, Walmart’s dividend growth rate has been 12.79%, while Target has an annual compound growth rate of 16.65%.
Dividend payout ratio is a good measure to use to determine how safe the company’s dividend is. It provides an indication of how much money a company is returning to shareholders versus reinvesting profits back into the business. If a company’s payout ratio is more than 100%, it is returning more money to shareholders than it is earning and will probably be forced to cut its dividend. Walmart has a payout ratio of 41.8%, while Target’s payout ratio is 47.45%, which is quite high.
Both companies must find a way to keep growing earnings if they’re going to keep fuelling their dividends. Based on analyst expectations for earnings growth for the next five years, Walmart and Target’s growth rates are 3.11% and 11.14%, respectively.
We also want to determine how cheap the stocks are by comparing their earnings to their stock prices. Both stocks are reasonably priced. WMT stock and TGT stock trade at 14.83 and 15.28 times their forward earnings, respectively.
The Winner Is…
Both Walmart and Target are great picks to consider for any dividend investor’s portfolio. As a pure income play, however, Walmart has the higher yield. Having said that, earnings at Walmart will be slow over the next couple of years, which may affect WMT stock’s dividend growth. Target’s earnings over the next couple of years will greatly outpace Walmart’s, so any investors looking for dividend growth, Target is the better choice to consider.