Target: Dividend Dynamo or the Next Blowup?

Before you go, we thought you'd like these...
Before you go close icon

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Target (NYS: TGT) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Target is a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Target yields 2.3%, slightly higher than the S&P's 2%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Target's payout ratio is a modest 24%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- a ratio less than five can be a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's see how Target stacks up next to its peers:

Target125%7 times
Wal-Mart (NYS: WMT) 83%11 times
Home Depot (NYS: HD) 61%12 times
Kohl's (NYS: KSS) 66%7 times

Source: S&P Capital IQ.4. GrowthA large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Here's how Target has performed over the last few years:

Target8%21%
Wal-Mart9%16%
Home Depot(3%)9%
Kohl's8%0%

Source: S&P Capital IQ.The Foolish bottom lineTarget exhibits a clean dividend bill of health. It has a decent yield, a modest payout ratio, a reasonable debt burden, and growth to boot. To stay up-to-speed on Target's dividend progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Wal-Mart Stores and The Home Depot.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners