Target proves its value as a dividend stock

Target’s (TGT) latest dividend announcement got a lot of attention for its bungled delivery. It published the news of its dividend boost before the board of directors had actually sat down to vote on it.

Oops. I suppose it would have been embarrassing—and detrimental to Target’s stock price—if the board had opted not to approve the dividend hike. But that’s rarely a problem for Target.

You see, Target is one of the most reliable dividend raisers in America, which is a major reason I own it in my Dividend Growth Portfolio. Let’s dig into the details.


Deep Dive

Target raised its quarterly dividend by 7.7%, from 52 cents per share to 56 cents. This is 44th consecutive year that Target has bumped its dividend. Not a bad run indeed.

The 7.7% increase isn’t a bad hike given the weakness in the retail sector this year. But it’s one of the skimpier dividend hikes Target has made in a long time.

This time last year, Target hiked its dividend by 20.6%. And over the past ten years, Target has managed annual dividend growth of 20.2% per year.

What’s impressive about Target’s dividend growth is its consistency. Those 20% annual gains are not the result of large increases years ago that skew the averages today.

Over the past three and five-year periods, Target has generated dividend growth of 20.0% and 23.4%, respectively.

Outpacing Bonds

Target’s dividend yield on June 18th, at current share prices, is 2.53%. That might not sound particularly high, but remember, the 10-year Treasury still only yields a measly 2.3%.

Let’s now take a look at how that dividend growth affects investor returns. One of my favorite metrics is “yield on cost.”

This is effective dividend yield you receive on your original purchase price (Current annual dividend per share / purchase price).

If you had bought Target three years ago and held until today, your yield on cost would be 4.5%, about in line with the current yields on many REITs.

If you had bought Target five years ago and held until today, you’d be enjoying a yield on cost of 7.4%, which is more than most junk bonds pay today.

Sweet Dividends

And if you had bought Target ten years ago and held until today, you’d be looking at a yield on cost of 16.5%… a yield you’d be lucky to find in a distressed mortgage REIT these days.

I know, I know. “Past performance is no guarantee of future results,” and we have no way of knowing if Target’s next ten years will be as generous to shareholders as the previous ten.

But given Target’s track record here, I’m giving the company the benefit of the doubt.

And in case you needed an additional sweetener, dividends are not the only way that Target shares its largess with shareholders.

In the same announcement, Target announced it was expanding its $5 billion share repurchase program to $10 billion. Since 2004, Target has reduced its shares outstanding by more than 37%.

Disclosures: Author is long TGT.

Photo Credit: Mike Mozart via Flickr Creative Commons

The investments discussed are held in client accounts as of June 18, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.