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.
Dividend grower
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.
Better times
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.
