Department Store Stocks That Pay You: Kohl’s Corporation (KSS), Macy’s, Inc. (M)

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The fact of the matter is, department stores and I don’t usually get along. But despite my predilection for dressing as though I were homeless and wearing my clothes until they literally fall apart, I have a lot of respect for stores that make a profit off of people’s desire for a particular image. I also like when these kinds of stores have the potential to pay me.

Let’s Start in the Middle

Kohl’s Corp. call options active as shares sell offKohl’s Corporation (NYSE:KSS) is a pretty solid-sized company at a $10.59 billion market cap. But that doesn’t have anything to do with its actual operation. The dividend rate is 2.8%, which is pretty good. I also respect that the company’s payout ratio is only 28% of its free cash flow, which lends some credit to the sustainability of this dividend.

Of course, Kohl’s is far from perfect. It isn’t high-end enough to escape competing against Wal-Mart Stores, Inc. (NYSE:WMT), which can hurt virtually any business. I’m also not confident about the fact that Kohl’s is only pulling trailing 5.6% profit margins and that its quick ratio is only .10. All told, I’m not sure if Kohl’s has sufficient cash after paying its expenses to take care of its financial obligations if anything goes wrong, and there are few more disheartening things than watching a decent dividend get suddenly slashed. I would suggest treading cautiously.

How’s the Top Shelf Handling the Economy?

Macy’s, Inc. (NYSE:M) is a slightly different story. Macy’s price point tends to be higher for its higher end goods, which has greater potential to drive revenues than the Kohl’s crowd. The 22% payout ratio and 2% dividend yield are good, so I’m intrigued enough to investigate further.

Unfortunately, retail has been hit pretty hard and the upper-middle range is still suffering somewhat. With only 5% profit margins and a quick ratio of .20, I don’t see any compelling evidence that Macy’s won’t drop their dividend if they have a bad quarter. Again, it’s good to tread cautiously.

How’s the Discount Level Doing?

The TJX Companies, Inc. (NYSE:TJX) occupies the niche at the other end. Being the biggest international home fashions and apparel off-price store in the US means that the recession hasn’t hit the company quite as hard as it has hit others. Pulling 7.1% profit margins and working with a wider potential range of people who aren’t ready to slide to Wal-Mart but can’t quite handle Macy’s prices offers a lot of flexibility. Since Q1 of 2012, TJX’s sales have grown 10.7% while retail sales as a whole have slid. That seems pretty robust.

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