The Best 3 Retail Stocks to Buy and Hold for Decades
Key Points
Target is a Dividend King and one of the largest retailers in the United States.
Lowe's is another Dividend King retailer, and it has a more attractive valuation than its main rival.
Dividend King Federal Realty has a small portfolio of very well-located retail properties.
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The retail sector can be difficult to follow because of often fickle consumer preferences. What's hot one day can be cold as ice the next. The best way for investors to sidestep this risk is to buy companies that have proven over time that they can adjust along with the markets they serve.
Two retailers that have done just that are Target (NYSE: TGT) and Lowe's (NYSE: LOW). And high-yield retail-focused real estate investment trust (REIT) Federal Realty (NYSE: FRT) has also shown its resilience over time. The key dynamic is that all three are Dividend Kings.
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What does it take to be a Dividend King?
A company must increase its dividend annually for 50 consecutive years to be considered a Dividend King. A record like that can't be built by accident; it requires a strong business model that gets executed well in both good times and bad. Simply put, Target, Lowe's, and Federal Realty have proven that they can survive over the long term.
Image source: Getty Images.
They will all go through difficult times, noting that Target is in the middle of a business overhaul right now. However, if history is any guide, these three retail-focused businesses will continue to reward investors with reliable dividends backed by growing businesses.
Target is a work in progress
Target is likely the most aggressive option on the list. It has a historically high dividend yield of 3.8%. Despite a recent stock rally, the shares are down more than 50% from their 2021 highs. If you have a value bias, this retailer will likely be of interest to you.
The key is that Target is generally focused on offering a more upscale retail shopping experience than its key rival, Walmart (NASDAQ: WMT). Consumers are tightening their belts right now, so Walmart is performing better. Target is making changes to bring back customers, including cutting costs. But it is also leaning into its upscale feel, so it remains differentiated from Walmart. Eventually, customers will likely reopen their wallets, and Target's business will improve as shoppers trade back up again.
Lowe's beats Home Depot in two key ways
Home improvement retailer Lowe's is a Dividend King. Key revival Home Depot (NYSE: HD) is not. Lowe's price-to-earnings ratio is 19x, and its price-to-sales ratio is 1.5x. Home Depot's P/E is 22x, and its P/S ratio is 1.9x. So, all in, Lowe's has a more impressive dividend history, and it looks more attractively valued.
To be fair, home improvement stores could be in for a rough ride if the U.S. economy falls into a recession. However, Lowe's has proven it can survive such downturns while continuing to reward investors well for sticking around. If you think in decades and like attractively valued stocks, Lowe's and its roughly 2% yield will probably be a good fit for your portfolio.
Federal Realty is the only Dividend King REIT
Federal Realty switches things up a little bit because it is a retail landlord, with a portfolio of roughly 100 well-located strip malls and mixed-use properties. It is the only REIT that has managed to achieve Dividend King status, proving its quality over quantity approach is a success.
That said, the real key to Federal Realty's success is its highly active portfolio management. It is always redeveloping assets to keep them desirable for tenants and customers. And it will sell assets once they have reached full valuation, replacing them with new properties that need some tender loving care. If you don't mind owning a REIT that takes a sharp-shooter approach, Federal Realty's attractive 4.3% dividend yield could be a great fit for your income portfolio.
Three reliable dividend stocks in the retail sector
Retail brands come and go with surprising regularity, but Target and Lowe's continue to thrive. And they both reward investors with reliable dividends. Federal Realty owns properties that retailers want to be in, and it has an unmatched record of dividend growth in the REIT sector. If you plan to buy and hold a retail stock for decades, these three Dividend Kings should be on your short list today.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust. The Motley Fool has positions in and recommends Home Depot, Target, and Walmart. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
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