3 Dividend-Paying Growth Stocks to Double Up on and Buy in September

Key Points

• Realty Income's monthly dividend looks attractive as the company begins to benefit from upcoming interest rate cuts.

• Target's missteps have not put its generous dividend at risk.

• PepsiCo offers high dividend returns at a valuation that is likely lower than it appears.

• 10 stocks we like better than Realty Income ›

One enduring strength among the more prominent consumer stocks is their dividends. Many have maintained dividend payments for decades and, in many cases, they raise their dividends on an annual basis.

Some of these stocks also happen to offer dividend yields that are significantly above the S&P 500 average of 1.2%. Admittedly, such yields often come with depressed stock prices. Still, as business conditions improve, investors could benefit from high dividend returns and, possibly, stock price recoveries in these three stocks.

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1. Realty Income

Investors know Realty Income (NYSE: O), which bills itself as the "monthly dividend company," for living up to that moniker. Not only has the real estate investment trust (REIT) maintained this trend since 1994, but it has also hiked its payout at least one time per year since then. At almost $3.23 per share annually, its current yield is about 5.4%.

It has funded those dividends by owning single-tenant, net-leased properties. This provides the company with a steady income as tenants cover the costs of maintenance, insurance, and property taxes. Currently, it has leased nearly 99% of the approximately 15,600 properties it owns.

Despite that success, interest rates rose early in the decade, leading to the stock selling at more than 25% below its all-time high. High rates have not slowed its profitability, as it earned $4.11 per share in funds from operations (FFO) income, a measure of a REIT's free cash flow. This means the stock trades at just 14 times its trailing FFO income.

Additionally, amid an economic slowdown, the Fed is finally poised to cut interest rates. This should allow the company to refinance existing debt and fund new property developments at a lower cost, possibly serving as the catalyst its stock needs to finally recover.

2. Target

Target (NYSE: TGT) has steadily trended downward since peaking in late 2021. It has lost nearly two-thirds of its value during that time as an uncertain economy, supply chain woes, and a series of controversial political stances led to fewer shoppers.

Moreover, the recent appointment of COO Michael Fiddelke as its next CEO drew a negative reaction from investors.

Despite a falling stock price, Target continued a pattern of annual payout hikes. With the streak now at 54 years, it is a Dividend King, a status that companies tend not to abandon unless necessary. That payout, which now amounts to $4.56 per share annually, yields more than 4.8%.

Fortunately, the $2.9 billion in free cash flow over the last year exceeded the approximately $2.0 billion spent to finance the dividend. Thus, Target can probably sustain its payout.

Additionally, the stock price likely factors in its challenges, especially considering that its P/E ratio of 11 is well below Walmart's 38 earnings multiple. As Target works through its challenges, it will pay investors well to hold the stock as it works to get back on track.

3. PepsiCo

Beverage and food giant PepsiCo (NASDAQ: PEP) is another consumer dividend stalwart that has struggled. In addition to its flagship beverage, it owns hundreds of brands. These include Mountain Dew, Aquafina, Frito-Lay, and Quaker.

Health-conscious consumers are purchasing fewer sugary beverages and packaged foods, which has weighed on the stock. Consequently, the stock has lost about 25% of its value over the last two years.

However, like Target, PepsiCo is a Dividend King, having maintained a 53-year streak of increases. Its yearly payout of $5.69 per share yields about 3.75%. It generated nearly $7.1 billion in free cash flow over the last year, just shy of the $7.5 billion spent on dividend costs. Still, its $8.0 billion in liquidity should cover the payout while it works to improve its free cash flow.

Moreover, its free cash flow does not include a $1.86 billion impairment of intangible assets. That one-time charge helped raise its P/E ratio to 27. Still, its forward P/E ratio, which does not include such charges, is at 18, implying this is a reasonably priced stock.

Ultimately, new PepsiCo investors can buy a solid, generous income stream cheaply as the company reinvigorates its product lines. Such efforts should help the stock recover, making it a likely growth and income play.

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Will Healy has positions in Realty Income and Target. The Motley Fool has positions in and recommends Realty Income, Target, and Walmart. The Motley Fool has a disclosure policy.