Investing in stocks that pay dividends can be a good way to generate income. Additionally, companies that pay dividends tend to be more mature, offering stable earnings and cash flows — features that can make an investment less risky.
Target (NYSE:TGT) and eBay (NASDAQ:EBAY) could be good candidates if you’re looking for dividend stocks to add to your portfolio. Both have thrived during the pandemic and are likely to hold their own during economic reopenings as well.
Ranked the seventh-largest retailer in the U.S., Target has a record of increasing its dividend every year dating back to 1971. Such a long history of delivering growing dividends can make an investor more secure in a company’s stability. Recently, Target announced a 32% increase in its quarterly dividend to $0.90 per share. That amounts to $3.60 per share annually if it continues at that rate, up from the $2.68 it paid in fiscal 2020. The dividend yield is 1.45%, higher than the 1.29% on the S&P 500.
The company thrived in fiscal 2020, growing sales by 19.8%. The momentum is flowing into 2021 as Target continues to optimize the business. The rollout of same-day fulfillment services for orders that start online — and then are picked up in person or delivered for a fee in hours — has been popular with consumers and is accounting for a rapidly increasing part of sales. Importantly, when a customer chooses one of these options, it costs Target far less than shipping the item to the customer’s home.
The trend is showing up in results. Management estimates Target will report an operating profit margin north of 8% for fiscal 2021. That would be the highest for the company dating back at least 10 years.
The market has noticed, and the stock is up 40% in 2021. Still, shares of Target are not expensive. Trading at a forward price-to-earnings ratio of 19, its stock is relatively fairly valued.
While eBay does not have as long a history of paying a dividend as Target, it can still be a good stock to consider. Like Target, the company has done well during the pandemic but for different reasons. People looking to avoid making trips to physical stores went to the company’s website for some of their shopping needs.
eBay’s business model brings buyers and sellers of items together in its online marketplace. The company takes a commission from each transaction. It does not operate fulfillment facilities or carry inventory. This policy allows eBay to generate a high profit margin. Indeed, over the past decade, eBay averaged an operating profit margin of 23.9%. Businesses that are asset-light, like eBay is, and generate a high profit margin, as eBay does, make for excellent dividend stocks.
For the three months ended June 30, eBay paid investors dividends of $0.18 per share, up from $0.16 a year earlier. Annualized, eBay’s dividend will come to $0.72, giving it a 0.95% dividend yield — and the company’s excellent profit margin could allow it to increase those dividend payments over the long run.
Fortunately for investors, the stock is not expensive. It’s trading at a forward price-to-earnings ratio of 19.6. In fact, both Target and eBay are good values for dividend investors at current prices.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.