3 Dividend Growers At The Top Of My Watch List

Brett Owens, Chief Investment Strategist
Updated: November 20, 2015

The holiday season won’t be so cheery according to Wall Street. Concerns over dismal holiday retail sales have taken the lift out of October’s rally and weighed on the S&P 500.

Wal-Mart (WMT), Amazon.com (AMZN) and Target (TGT) are under the microscope heading into this upcoming Black Friday. But weekly price gyrations don’t matter as much as earnings and dividend growth. We should use short-term concerns about the sector as potential buying opportunities – especially for perennial dividend growers.

So what can we expect from retailers this holiday season?

According to the October U.S. Retail Spending survey – which increased just 0.1 percent – consumers are spending about the same, but slightly less than analysts were expecting. However, the National Retail federation (NRF) is expecting a 3.7% increase in retail sales this year – higher than its 10-year average of 2.5%.

Of the whopping $630.5 billion in annual retail sales, roughly 19% will happen this holiday season. Online sales – which are expected to grow up to 8% over last year – will represent $105 billion of this. The heavyweights and best-of-breeds tend to dominate, so let’s start with them. Then, I’ll share my three favorite “second-level”retail investments – which all have a fine history of dividend increases.

This year, Amazon (AMZN) is once again determined to capture an even larger portion of holiday sales. In addition to 150 limited-time “lightning deals” it’s also going to add a new holiday deal every 5 minutes during the Black Friday rush.

That’s exciting news for Amazon – and bad news for everyone else. Especially the largest brick-and-mortar retailers, which continue to fall further behind the e-commerce curve.

I recently railed on Wal-Mart (WMT) for this reason, warning readers that this dividend aristocrat was living on past glories. The giant retailer just reported better than expected earnings, but on lower revenue. I’ll give them credit – they are trying desperately to compete with Amazon online. Global e-commerce sales rose 10% year-over-year, giving investors hope that its Silicon Valley-based WalmartLabs research facility is turning the tide.

I asked one of my high-level industry contacts about the outlook for Wal-Mart vs. Amazon in the online arena and he confirmed my guess that it’s going to be no-contest in favor of Amazon. Still, after a 50% decline this year, WMT trades at just 12.7 times earnings. The stock pays a 3.2% dividend that should be well supported (though I doubt it will grow as it has in the past). And management just announced a $20 billion share repurchase program. So while upside may be muted, downside also appears to be limited for WMT.

Target (TGT) just announced that it matched analysts’ earnings estimates on slightly lower revenue. Despite this, the company increased its forecast for full year, the second time it’s increased guidance in three months.

Target also has been trying to compete directly with Amazon. The company announced free shipping on all orders during the holidays. I personally have more hope for Target’s innovation potential than I do it’s lumbering legacy competitor.

As does legendary hedge fund manager George Soros, who just upped his stake in Target. At 15.9, TGT has one of the lowest price-to-earnings (P/E) ratios in the retail segment next to WMT, Macy’s Inc. (M), and Kohl’s (KSS).

Target pays a $0.56 dividend quarterly for a 3.2% yield. The company most recently raised its payout from $0.52 last May.

One of the striking similarities of the brick-and-mortar retailers has been their ability to increase earnings with flat to slightly lower revenue. And looking ahead, research from NerdWallet revealed that almost every single retailer offering Black Friday deals had items with the same prices as last year.

These repetitive deals should give retail bulls pause. It’s an indication that this year might look exactly like last year. Which was OK, but not a blockbuster.

While I’m lukewarm on Wal-Mart and Target because they compete with Amazon, and Amazon itself because it doesn’t pay a dividend, I do have three niche retailers on my watch list. These days, it’s important to service a unique segment of the market. If you’re a generalist, Amazon will crush you.

All three of these companies are perennial dividend growers. If Black Friday disappoints and retail stocks get slammed across the board, these issues are all worth close consideration.

Penske Automotive Group (PAG) should capitalize on our bullish outlook for autos. The company has increased its dividend for five years counting. It pays a modest 2.2% today, but there’s plenty of room for yield growth with a payout ratio of just 25% and an impressive 3-year dividend growth rate of 48%.

Tiffany (TIF) benefits from its lofty luxury status above the Amazon fray. It also pays 2.2% and has boosted its payout for 13 years in a row. Over that time its dividend has increased nearly ten-fold.

Finally the Gap (GPS) has been struggling to keep up with fickle fashion trends lately. It’s down more than 45% from its recent September 2014 recent highs. But if management can figure out the fashion part, shareholders will surely get treated well. The company has increased its dividend for 11 straight years. It pays 3.7% today, and room for future increases with a payout ratio at just 34%. For the last three years management has boosted its payout by 25% annually.

Unless these stocks become screaming bargains, I’m going to stay on the sidelines. Retail is so fickle that I require a very high margin of safety.

Right now, I like three big dividend payers (and growers) that operate in a sector that’s not fickle at all: healthcare. When you need care, you’re going to get care – and that’s what these three companies provide. What’s even better is that they’re paying 7%, 7.5%, and 8.2% respectively today – and are likely to continue boosting these payouts annually going forward. You can get the full details on these “perfect income investments” right now AND learn on how my second-level analysis uncovered it.