1 Dividend Stock to Double Up on Right Now

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18 hours ago

Economic headwinds, tariffs, and missteps on social issues have weighed on Target's business.
The good news? Target is a financially sound company with a safe dividend.
Target has work to do to get the business going, but the stock's cheap valuation and generous dividend yield could pay off for patient investors.
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Retail is a competitive and dynamic business, so Target (NYSE: TGT) deserves credit for its generations of steady success. That said, things haven't been rosy lately. The company's sales are in decline, and the stock has plummeted over 60% from its high, its sharpest decline since the 1990s. Things don't get this bad without some mistakes, no doubt. But is Target a dying company?
I don't think so. Target hasn't been an awful investment for several years now, but that's then, and it's time to focus on the future. The company is working through some challenges, but remains fundamentally sound, with reasons for optimism.
Here is why investors should consider doubling up on this Dividend King today.
Target's sales plateaued and began to decline over the past few years. Consumers behave differently for various reasons, but one major trend is that they have become increasingly financially strained over the past few years, primarily due to rampant inflation.
Unique, cool, discretionary merchandise is the foundation of Target's brand.
Groceries and household essentials only accounted for 40.5% of total merchandise sales last year. Therefore, when consumers cut back on things they may want but don't need, Target will feel the impact. Tariff uncertainty in recent months has only worsened consumer sentiment, which has plummeted to its lowest level since July 2022.
Additionally, Target's decision to walk back diversity, equity, and inclusion (DEI) policies earlier this year sparked backlash from shoppers who organized a 40-day boycott that began in early March.
It leaves Target searching for momentum after the company's merchandise sales dropped 3.1% year over year in Q1 2025, following a 3.2% decline in Q1 2024.
Given all that, it's clear why the stock has done so poorly. Still, it's a stretch to say the business is dying.
Stagnant, or struggling? Yes, but Target's financial foundation remains sound to this day.
Start with a dividend that has ample coverage, despite its 4.4% yield sitting near its all-time high. Target spends a total of $2 billion annually on dividends, but generated over $3.5 billion in free cash flow over the past year.
If cash flow does dry up, Target still has a strong balance sheet, including nearly $2.9 billion in cash -- enough to fund the dividend for a year, and an investment-grade credit rating. The financial stability affords Target the ability and time to rethink its business strategy and implement changes to regain sales momentum.
The dividend is particularly important to companies with a long history of dividend growth. If Target, with nearly six decades of consecutive dividend increases, were to cut the payout, it would be very telling and a huge red flag about what management thinks of Target's prospects.
Looking elsewhere, Target is leaning into growth. It plans to open 300 new stores over the next decade, which will increase its footprint by approximately 15%. Target has less than half the number of stores as Walmart, so the U.S. market should be able to support the expansion.
Target's struggles have cratered the stock price and Wall Street's expectations. Analysts currently expect virtually no long-term earnings growth. Such a pessimistic view could be assuming the worst, including things like:
Target's expansion plans having no impact on growth.
Shoppers permanently turning away from the Target brand.
Discretionary spending not recovering over time.
The negativity has priced Target at a price-to-earnings ratio of just 11, a significant gap down from archrival Walmart, which currently trades at 41 times earnings.
Assuming Target's 4.4% dividend remains intact, all the company needs is mid-single-digit earnings growth over the long term to generate double-digit annualized investment returns. Even doing that would likely boost sentiment toward the stock, further rewarding investors as the stock's valuation rises a notch or two.
The bottom line?
Target would need to completely fail to figure things out for the stock not to improve at least somewhat from its current levels. That doesn't guarantee that Target will figure things out, or that the stock won't go down further, but it's a compelling setup that makes the stock worth buying and collecting the dividend while you wait.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.
1 Dividend Stock to Double Up on Right Now was originally published by The Motley Fool