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

Investors often closely track the fluctuations of the stock market, eagerly expecting price increases. However, they may overlook another significant source of returns: dividends paid by companies to their shareholders. This aspect becomes even more appealing when considering companies that have a track record of consistently increasing their dividends over time. That’s where Dividend Kings come into play. These companies have raised their payouts for at least 50 consecutive years, which is not as easy as it sounds. Hence, only 54 out of thousands of publicly traded companies in the US have managed to achieve this goal.

Dividend stocks have played an important role in the market’s overall returns historically. Dividends have accounted for 34% of the market’s returns on average from 1940 to 2023. Particularly, from the mid-1800s to the mid-1900s, these stocks were the primary factors driving stock returns along with earnings growth. Warren Buffett recognized the value of dividend growth stocks. In August 1994, his company acquired 400 million shares of Coca-Cola, valued at $1.3 billion. Initially receiving a $75 million cash dividend from Coca-Cola in 1994, this amount increased significantly to $704 million by 2022. Buffett foresaw the compounding benefits of his initial investment in Coca-Cola, understanding how dividends would enhance returns over time. He once said:

“By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings [the dividends paid] exceed 100% of what we paid for the business.”

ALSO READ: Warren Buffett’s 8 Best Dividend Stock Picks

Dividend growth stocks have been hitting on all cylinders over the years. The Dividend Aristocrats index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, has delivered impressive returns in the past, outperforming other asset classes despite fluctuating market conditions. ProShare highlighted the appeal of investing in this index, especially for income investors. The report noted that the index has consistently outperformed the broader market while maintaining lower market volatility since its inception. According to the report, an initial investment of $10,000 in May 2005 could have grown to over $61,000 by March 2023. In addition, the Dividend Aristocrats index surpassed the market in eight of the ten largest quarterly downturns since 2005. Recently, we covered the list of the 25 Best Dividend Aristocrats to Buy according to Street Analysts.

Although dividend growth stocks have delivered strong returns over the years, the challenge lies in maintaining purchasing power against inflation. High Yield Dividend Aristocrats index, tracking companies that have raised their payouts for at least 20 consecutive years, has grown its dividends at a rate that has surpassed inflation over the long term. The index generated an annualized return of 13.86% over the past 15 years, whereas the Consumer Price Index (CPI) returned 2.6% during this period. This shows how important dividend growth is in the grand scheme of things. In this article, we have discussed some of the best dividend kings that have shown solid dividend growth over the decades.

Our Methodology:

For this article, we scanned the list of dividend kings, which are the companies that have raised their payouts for 50 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).

Target Corporation (NYSE:TGT)

5-Year Average Annual Dividend Growth Rate: 11.44%

Target Corporation (NYSE:TGT) is a Minnesota-based retail corporation that operates a chain of discount stores and hypermarkets. While the company saw substantial sales and margin growth early in the pandemic, it has since encountered stagnant sales growth and a sharp drop in margins, from which it is still trying to recover. The company faced significant setbacks due to supply chain disruptions, inflation, and reduced consumer spending on non-essential items. It reported a 3.7% year-over-year decline in its comparable sales in the first quarter of 2024. The company’s revenue of $24.5 billion also fell by 3.12% from the same period last year. It expects a 0% to 2% rise in comparable sales and projects GAAP and adjusted EPS to be between $8.60 and $9.60. The midpoint of this range, $9.10, is only 1.8% higher than the $8.94 in GAAP EPS that the company achieved in 2023.

That said, Target Corporation (NYSE:TGT) relies on providing an exceptional in-store shopping experience to justify its higher-priced product range and to maintain a higher operating margin. Additionally, with a trailing twelve-month free cash flow of $3.1 billion and operating cash flow of $8.4 billion, the company’s ability to sustain its dividends is evident. Its payout ratio is low at 49%. In the first quarter, the company returned $508 million to shareholders through dividends, up from $497 million from the prior-year period. It has been raising its dividends consistently for the past 53 years, which makes it one of the best dividend kings on our list. Over the past five years, it has raised its payouts at an annual rate of 11.4%. On June 12, the company raised its quarterly payout by 2% to $1.12 per share. The stock’s dividend yield on June 19 came in at 3.14%.

Target Corporation (NYSE:TGT) has a forward P/E ratio of 15.34, compared with a forward P/E of 28.01 for Walmart Inc. (NYSE:WMT). TGT’s low P/E ratio indicates that the stock is undervalued, which reflects our expectation of continued growth potential. The company’s earnings outlook appears optimistic, as it plans to expand by opening approximately 300 new stores over the next decade. This will significantly increase its sales volume and overall consumer foot traffic.

Target Corporation (NYSE:TGT) was a popular buy among elite funds during Q1 2024 as hedge fund positions in the company grew to 67, from 58 in the previous quarter, according to Insider Monkey’s database. These stakes have a consolidated value of over $2.26 billion. With nearly 3 million shares, Diamond Hill Capital was the company’s leading stakeholder in Q1.

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

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