History Says Buying Target Stock at a 5% Dividend Yield Is a Good Move. But Is It?

Of all of the publicly traded companies that have ever been, relatively few have ever been able to pay and raise a dividend for at least 50 consecutive years. That's what it takes to become a Dividend King. And current dividend royalty includes retail chain Target (NYSE: TGT), which has paid and raised its dividend for 55 consecutive years.

As of this writing, the dividend yield for Target stock is quite high at 4.9%. This means that for every $100 invested in Target stock, investors can expect almost $5 annually in return. This is a good yield. And in fact, over Target's illustrious dividend history, it's only been above 4.5% one other time, according to YCharts.

Image source: Getty Images.

The previous high point for Target's dividend yield came back in July 2017. If you had invested then and held for five years (a good holding period for long-term investors), you would have nearly tripled your investment, not to mention you would have collected dividend payments along the way.

In short, history says it's a good idea to invest in Target stock when its dividend yield approaches 5%. Could that be true again today with Target's dividend yield sitting near an all-time high?

But first, why is Target's dividend yield so high?

There's an inverse relationship between a stock's price and its dividend yield. If a company has a $100 stock and a $2 dividend, its yield is 2%. But if its stock price falls to $50 and it keeps its dividend at $2, its yield jumps to 4%. And this is why Target's yield is so high right now -- its stock price is down 66% from its all-time high.

Target stock is down because its business is struggling in certain areas. Net sales fell less than 1% year over year in 2024 and for 2025, management is projecting an additional modest decline. In short, Target is struggling to move its merchandise.

When there is sales pressure in retail, margins normally come under pressure. And that's the case for Target. In the first half of its fiscal 2024, the company had an operating margin of 5.9% but this slipped to 5.7% in the first half of its fiscal 2025. That might sound like a small change. But Target has over $100 billion in annual sales volume so that small margin change is significant.

The profit margin issue is relevant because certain expenses go up even when sales are stalling. Specifically, Target has substantial debt, and it paid $232 million in interest in the first half of 2025, which was up 7.5% from the comparable period of 2024.

Considering sales are struggling, margins are under pressure, and interest expenses are up, Target's earnings are down, which is largely why the stock is down.

Is Target stock a good buy now?

From a valuation perspective, Target stock is undeniably cheap. The high dividend yield is one indication here. But it also trades at less than 11 times earnings, which is pretty close to its cheapest valuation over the last decade.

TGT PE Ratio data by YCharts

In short, Target stock trades at an attractive valuation. And if it can turn things around with the business -- grow the top line and improve margins -- then the stock could respond with a market-beating performance like it did in 2017.

Regarding upside potential for Target, I'd like to preface it by saying that I don't believe the business situation is as dire as some believe. After all, the sales decline is small. And the chain still has over $100 billion in annual sales. Few chains are as big as this and it's a testament to Target's strength.

Target is experiencing growth in parts of its business, and therein lies my optimism for its ability to improve. In its fiscal second quarter, net sales were down 1% year over year. But Q2 advertising revenue was up 34%. And its third-party marketplace business, Target Plus, enjoyed double-digit growth as well.

Whereas selling merchandise in its stores is a low-margin business, Target hopes to boost its profits with growth in these digital offerings, including advertising and its third-party marketplace. That's worked for other retail chains and the company is enjoying a good growth rate in these areas. That's promising when looking ahead.

Personally, I think investors should give Target the benefit of the doubt. It's not a Dividend King by accident -- it's navigated quite a few headwinds over the past several decades. I believe it can navigate its present headwinds as well and some of its promising revenue streams are gaining momentum. For these reasons, I believe Target stock could be a good buy today with its dividend yield approaching 5%.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.