On the surface, they may be boring. But “dividend aristocrats” have been the biggest creators of wealth in the last century.
So, if you’re looking to seriously grow your nest egg, you’ve got to consider adding these stocks to your portfolio.
Dividend aristocrats are a group of stocks that have increased their dividends for 25 years in a row or longer. The list comprises some of the best companies in the U.S. They have highly profitable business models, and long-term competitive advantages.
These are stocks that have increased their dividends for several decades in a row. And they’ve demonstrated the ability to withstand various challenges as they come.
Discount retail giant Target (NYSE: TGT) is one dividend aristocrat that has increased its dividend for more than 40 years in a row.
Everyone knows that this is a difficult time for retailers like Target. Retail in general is struggling, due to declining mall traffic, and the threat of e-commerce giant Amazon (NASDAQ: AMZN). As a result, Target shares have lost 25% of their value this year.
But that decline makes now the perfect opportunity to buy Target. The stock is cheap, the company has a plan to return to growth, and the share price decline has lifted the dividend yield to a hefty 4.6%.
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Turnaround Strategy Is Right on Target
For retailers like Target, the most important financial metric is arguably comparable-store sales. This measures sales at stores open at least one year. It is a critical performance metric, that shows whether a retail brand is strong enough to sustain growth after the honeymoon period of a new store opening comes to an end.
Many retailers are reporting declining comparable sales, which has prompted store closures across the industry. Target ended 2016 on a sour note, as comparable sales declined by 1.5% in the fourth quarter. This was at the bottom end of management expectations, and explains why the stock has performed so poorly in 2017.
In response, Target launched an aggressive turnaround strategy. It is investing heavily to redevelop and modernize its stores, and is also opening dozens of smaller stores. These efforts are already starting to pay off: Target expects a 3%-4% sales lift per redeveloped store.
In addition, Target is opening small stores, under the CityTarget and TargetExpress banners. These stores will be opened in densely-populated areas with high foot traffic, including large cities and college campuses, that could not offer the square footage necessary to build a traditional large Target store. By 2019, Target expects to operate more than 100 small-format stores, a three-fold increase.
Lastly, Target is building its own e-commerce footprint, to better compete with Internet retail competition. Target’s e-commerce sales rose more than 30% last quarter.
These efforts are already starting to pay off. Target’s second-quarter earnings report handily beat analyst expectations. Comparable-store sales increased 1.3% for the quarter, nearly double what analysts were projecting. Earnings rose by 14% for the quarter.
Dividend Growth and Valuation Hit The Bullseye
Target is a rare stock, because it has appeal for both dividend growth investors, and those looking for higher current dividend yields. It’s among the highest-yielding Dividend Aristocrats, with a current yield exceeding 4.5%. This is more than double the average dividend yield of stocks in the blue-chip S&P 500 Index.
And, the company is likely to continue increasing its dividend each year. The dividend payout ratio stands at approximately 50%. That means Target distributes roughly half of its earnings as a dividend. This leaves enough room to invest in new stores and redevelopments, and also to continue raising the dividend each year.
Plus, Target is attractively valued. The stock has a trailing P/E ratio of just 11. With the potential for a return to earnings growth in 2018, the stock appears to be undervalued. As a result, Target is an attractive turnaround stock, for value and dividend investors.
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Disclosure: The author is personally long TGT.