Dividend Investing: Is This High-Yield Dividend King a Buy After a Dip?

When it comes to income investing, many investors will turn to Dividend Kings. These stocks have increased their payouts every year for at least 50 years, drawing investors with their decades-long track record of stability.

Of those stocks, Target (NYSE: TGT) has drawn attention for its relatively high yield. However, that dividend return has risen amid sales declines from a sluggish economy and public relations missteps. That leaves investors to figure out whether they should dismiss the company's challenges and pursue that yield, or stay away.

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Target and the state of its dividend

Indeed, it is hard not to like Target on the surface. The footprint of nearly 2,000 stores across all 50 states bolsters the company and is a key competitive advantage. With more than 75% of the U.S. population within 10 miles of a Target location, only Walmart can surpass its ability to combine in-store and online retailing.

That presence has helped support a lucrative dividend. Amid its recent payout hike, the company now pays investors $4.56 per share annually, a dividend yield of just under 4.8%. Considering the S&P 500's average yield of approximately 1.3%, Target stock could draw investors primarily for its payout.

Moreover, in fiscal 2024 (ended Feb. 1), Target generated almost $4.48 billion in free cash flow, well above the $2.05 billion dividend costs, so longer-term data show Target maintains a sustainable payout. Also, the recent dividend increase has given Target a 54-year history of payout hikes, maintaining its place as a Dividend King.

Admittedly, such a status does not negate its right to reduce or eliminate the payout in theory. Nonetheless, such a move would likely undermine confidence in the stock, as evidenced by the history of other companies that abandoned decades-long dividend increase streaks.

With its challenges, Target's stock is down by nearly 65% from its 2021 high. But even with its rock-bottom 11 P/E ratio, a dividend cut would probably lead to further stock selling, a scenario management likely wants to avoid.

Risk factors and Target stock

However, investors may need to accept some risks and watch free cash flows. Despite its positive free cash flows in 2024, Target reported $515 million in negative free cash flow in the first quarter of fiscal 2025 (ended May 3), a time when it also had to pay $510 million in dividends.

Target held $2.89 billion in cash and cash equivalents after paying dividends, so the dividend is not immediately in danger. Nonetheless, Target faces challenges that could endanger the payout if troubles persist. In Q1, revenue of $23.8 billion fell 2.8% over the previous 12 months. The 3.8% decline in year-over-year comparable sales contributed to this drop amid an uncertain economy, and higher costs related to the supply chain and digital fulfillment weighed on the company's financials. Such issues could persist as changing tariff policies could worsen supply chain pressures.

Additionally, many left-leaning consumers began avoiding Target amid the company's decision to end its DEI initiatives. This is after the company alienated right-leaning consumers earlier in the decade over promoting DEI. Amid these challenges, its negative quarterly results are not a one-time event, as revenue fell 1% during fiscal 2024.

The news is not all bad, as the fiscal Q1 net income of $1.04 billion rose 10% compared to the year-ago quarter. Still, that rise occurred as a result of an 11% reduction in selling, general, and administrative expenses. Since such spending cutbacks are probably not sustainable in the long run, Target will need to find a way to attract consumers if it wants to maintain long-term financial growth.

Is Target a buy after the dip?

Considering Target's extensive footprint, its low P/E ratio, and the ability to combine in-store and online retail, Target stock is likely a buy for its dividend yield.

The stock is cheap for a reason, as an uncertain economy and the company's political activities have discouraged consumers from shopping at Target.

Still, with its dividend sustainable in the long term and a 54-year streak of payout hikes, Target is likely to continue increasing its payout. Moreover, an 11 P/E ratio likely prices in the challenges Target faces, and its large footprint positions the company for a comeback.

Target's value proposition is strained but probably not broken, leaving it positioned to move higher and maintain its Dividend King status.

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Will Healy has positions in Target. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.