Successful dividend stocks have a long history in the consumer industry. Since purchasing its Coca-Cola stock in 1988, Berkshire Hathaway, led by Warren Buffett, has generated yearly dividend returns of more than 50% of the initial investment. In 1890, Procter & Gamble distributed its first dividend! Consumer dividend stocks continue to provide chances for novice investors, even if some of these businesses are probably better to hold than buy right now.
Many of them also offer the possibility of future dividend increases and pay dividends that are much higher than the 1.6% average of the S&P 500. Target (TGT -0.15%) and Advance Auto Parts (AAP -0.24%) are two dividend growth companies that should perform well for income investors given current market circumstances.
With its current annual payout of $4.32, Target generates a 2.6% return on investment. The business is a Dividend King because it has grown its dividend for 51 years running. An expectation that dividends would increase annually is created by such a lengthy run. It was noteworthy that Target increased its dividend by 20% this year and 32% in 2021 despite the continuous pressure.
Analysts attribute Target’s ability to enhance the dividend to this extent to its competitive advantages. Faster retail deliveries have been made possible by same-day fulfillment, which makes use of its 50-state shop base. Customers were probably also drawn by so-called “stores inside a store,” like the Ulta Beauty outlets within several Target stores.
These benefits are essential. Amazon, Costco, and Walmart continue to provide fierce competition. Additionally, Target issued a warning in June that its efforts to decrease its inventory will be hampered by an inventory overhang. As with many other retailers, Target placed excessive orders due to supply chain issues.
Its free cash flow has significantly decreased as a result of the necessity to liquidate merchandise. Target has posted a $2.6 billion negative free cash flow so far this year. Target spent $842 million on the dividend over the same time period, which may be the reason why its cash position has decreased to $1.1 billion from $5.9 billion at the end of 2021.
For investors, this isn’t always a negative thing. Target’s dividend should be sustainable at $2.1 billion in free cash flow for the first half of 2021. This should be good news for the business, along with the capacity to dramatically increase its dividend in a cutthroat industry.
2. Advance Auto Parts
Shareholders of Advance Auto Parts currently get an annual dividend of $6.00, or a yield of around 3.5%. Investors should pay attention to its recent dividend history, nevertheless.
Advance Auto Parts increased their yearly dividend to $1.00 per share in 2020 after years of paying just $0.24 per share. After that, the payment increased to $3.00 per share in 2021 and $6.00 per share presently. Over the course of three years, the payment increased 25-fold overall.
The need for transportation and the status of the auto industry have helped the retailer of auto components. Because most customers place a high importance on having functional vehicles, the auto parts industry is recession-resistant. The average age of a car, according to S&P Mobility, is up to 12.2 years, which will probably keep auto components in high demand.
It must still go up against AutoZone, Genuine Parts, O’Reilly Auto, and many more businesses. Additionally, since EVs usually utilize less components, the popularity of EVs might eventually put pressure on Advance Auto Parts.
Additionally, Advance Auto Parts has suffered with an inventory overhang, much like other businesses. Free cash flow decreased from $647 million in the same time of fiscal 2021 to $97 million in the first half of fiscal 2022 (which concluded on July 16). For the first two quarters of the year, dividend expenses from the dividend increases were $246 million.
Nevertheless, the 2021 free cash flow shows that it can pay its dividend as long as sales stabilize. Investors may still get a sizable cash return from this company even if the dividend increases cease for a while.