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One popular and successful investing strategy has been to put money into low-cost exchange-traded funds (ETFs) that track the major market indexes. One of the largest such funds is the Vanguard S&P 500 ETF (NYSEMKT: VOO).
However, right now, the S&P 500 index has a 1% dividend yield. For investors looking primarily for income-focused investments, there are better alternatives.
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Target (NYSE: TGT) provides both reliable dividends and strong opportunities for share price appreciation. The stock has a 3% yield and upside potential. If I had $1,000 that I was ready to put into the market right now, here's why I would buy Target's shares rather than the Vanguard S&P 500 ETF.
That company has paid dividends ever since it became a public company in 1967, and earlier this year, its board of directors approved a 1.8% increase to its quarterly dividend to $1.16 per share. That marked its 55th straight year of annual payout hikes. That remarkably consistent track record has earned Target a place in the select group of companies called Dividend Kings. To belong, a company must have increased dividends for at least 50 straight years.
Importantly, affording the payments doesn't seem like a problem. Target has a payout ratio (dividends divided by earnings) of 48%, giving it plenty of flexibility to keep raising the dividend even in challenging times like those it has been experiencing in recent years.
But no company can continue raising its payouts indefinitely if its sales and earnings remain stagnant. Fortunately, Target has taken steps to improve its results.
A new CEO took the helm this year. The board of directors decided to promote Michael Fiddelke. His strategy so far includes investing in technology and stores, and returning Target's focus to the types of differentiated merchandise that brought the company so much success in the past. Looking at its recent results shows his initial steps have resonated with consumers.
In Target's fiscal second-quarter, which ended on Aug. 1, same-store sales (comps) grew 3.8%. The company has also been more profitable: Operating income (excluding the benefit of tariff refunds) expanded by 0.7 percentage points to 5.9%. Notably, Target benefited from a reduced level of markdowns on its merchandise.
The company's shares have responded to the improved results. Target's stock price has gained 57.2% this year, through Oct. 9, versus 14.1% for the S&P 500 index.
This price movement has boosted Target's price-to-earnings (P/E) ratio from 12 to 16, which is back in line with its 10-year median. Still, I think it's fine to pay a fair price for Target, as it appears to be right at the beginning of a sales turnaround.
After all, the shares provide an attractive yield, as well as the potential for a nice total return opportunity.
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Lawrence Rothman, CFA has positions in Target. The Motley Fool has positions in and recommends Target and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
If I Could Invest $1,000 in Just 1 Dividend Stock for the Next 5 Years, I'd Pick This Clear Standout Over the Vanguard S&P 500 ETF (VOO) was originally published by The Motley Fool
