Is Target Corporation (TGT) the Best Dividend Growth Stock to Buy and Hold Now?

We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold Now. In this article, we are going to take a look at where Target Corporation (NYSE:TGT) stands against the other dividend growth stocks.

The AI sector maintained its momentum unabated in the second quarter of 2024, with tech stocks continuing to lead the charge. Despite the Fed scaling back rate cut expectations from three to one at the quarter’s outset, stocks surged to end in positive territory by quarter-end. This was buoyed by better-than-expected inflation numbers and strong first-quarter earnings. The broader market gained 3.48% in Q2 2024 and its 12-month returns came in at over 23.4%. Dividend stocks underperformed the broader market recently, but with tech giants now beginning to issue dividends, analysts are optimistic about dividend prospects this year. The recent addition of Alphabet to the dividend-paying group suggests that these mega-cap tech companies could increase their dividends gradually over time. However, analysts caution that current dividend yields from these stocks remain relatively modest.

In the current market environment, investors are keenly exploring opportunities to boost their income. Despite their low performance so far this year, dividends gain importance in this regard as they have historically been crucial in generating returns for investors over many decades. Since 1960, approximately 85% of the total cumulative return of the S&P 500 Index can be traced back to reinvested dividends and the compounding effect they offer.

When we talk about the compounding effects of dividends, we refer to the advantages they provide, particularly when they grow consistently over time. This growth allows for larger dividend payouts which, when reinvested, can further accelerate the overall investment return through compounding. In addition to providing compounding effects, companies that raise their dividends have also historically outperformed the market and those companies that cut or don’t pay dividends at all. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 9.62% return to shareholders from 1972 to 2018, compared with an 8.78% return of dividend payers. Dividend growers also outperformed dividend non-payers, who returned only 2.40% during this period. Read more about dividend growers in our article, Best Dividend Kings to Buy for Safe Dividend Growth.

A company’s past track record of growing dividends is often the best crystal ball for predicting future growth. A low payout ratio, which measures dividends against earnings, also signals potential for future dividend growth. High dividend yields can falter in tough times, precisely when investors rely on them most. Companies with a history of dividend growth demonstrate their resilience, continuing to increase dividends even in downturns. Currently, there is rising demand for companies that distribute dividends, driven by an aging US population, seeking additional sources of immediate income. According to a report by Janus Henderson, global dividends reached $1.66 trillion in 2023, growing from $1.23 trillion in 2020. The banking sector achieved record-high dividends last year, accounting for half of the global dividend growth. This increase was largely facilitated by a higher interest rate environment, which allowed many banks to expand their profit margins. The firm expects global dividends to reach their all-time high of $1.72 trillion in 2024, which would show a 3.9% growth from 2023 on a headline basis.

Companies that consistently raise their dividends have strong business models and solid balance sheets. In this article, we will take a look at some of the best dividend aristocrat stocks for dividend growth.

Our Methodology:

For this article, we scanned the list of Dividend Aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A woman purchasing groceries at a Target store, with a cart full of products.

Target Corporation (NYSE:TGT)

5-Year Annual Dividend Growth Rate: 11.44%

Target Corporation (NYSE:TGT) is a retail corporation that operates a chain of discounted department stores and hypermarkets. The company has been a strong dividend payer mainly due to its stable cash flow generation. It has a trailing twelve-month free cash flow of $3.1 billion and an operating cash flow of $8.4 billion. Moreover, the company's low payout ratio of 49% contributes a lot to its dividend increases and shareholder returns. In the first quarter of 2024, it returned $508 million to shareholders in dividends, compared with $497 million in the same period last year. On June 12, the company declared a 2% hike in its quarterly dividend to $1.12 per share. Through this increase, the company stretched its dividend growth streak to 53 years, which makes TGT one of the best dividend aristocrat stocks on our list. Its 5-year average annual dividend growth rate stands at 11.44%. As of July 2, the stock has a dividend yield of 3.08%, much higher than Walmart's dividend yield of 1.38%.

Target Corporation (NYSE:TGT) has consistently prioritized innovative shopping experiences for its customers. In addition, the company is expanding its focus on expanding its e-commerce presence through marketplace initiatives. Recently, the company unveiled a collaboration with Shopify, a global commerce platform, to feature a range of popular merchants and their products on Target Plus. This partnership enhances the company's third-party digital marketplace, providing customers with a carefully curated selection of goods. TGT has surged by nearly 8% over the past 12 months.

Target Corporation (NYSE:TGT) reported mixed results in the first quarter of 2024. The company sales and margin saw significant growth during the pandemic due to customer's inclination toward online shopping. Since then, the company has been struggling to reach that level due to supply chain disruptions, inflation, and reduced consumer spending on non-essential items. In the first quarter of 2024, the company reported revenue of $24.5 billion, which fell by 3.12% from the same period last year. Its comparable sales, though in line with expectations, also fell by 3.7% compared to the prior-year period.

At the end of March 2024, 67 hedge funds tracked by Insider Monkey held stakes in Target Corporation (NYSE:TGT), growing significantly from 58 in the previous quarter. These stakes are collectively valued at more than $2.26 billion. Among these hedge funds, Diamond Hill Capital was the company's leading stakeholder in Q1.

Overall TGT ranks 5th on our list of the best dividend growth stocks to buy and hold. You can visit 10 Best Dividend Growth Stocks to Buy and Hold Now to see the other dividend growth stocks that are on hedge funds’ radar. While we acknowledge the potential of TGT as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than TGT but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.