Best Stock to Buy Right Now: Target vs. Realty Income

Share prices of Target (NYSE: TGT) have fallen a huge 65% from their 2021 peaks. Realty Income's (NYSE: O) stock price is down around 24% from its 2020 high-water mark. Which of these beaten-down retail-focused businesses is the best stock to buy right now? That depends on how you look at the retail sector.

What does Target do? What does Realty Income do?

Target is a big-box retailer with stores across the United States. It sells a broad variety of goods from food to clothing to furniture. It competes most directly with Walmart, but generally attempts to provide a more upscale retail experience. It has a long history of growth behind it, highlighted by 58 consecutive annual dividend increases. At this point, however, the business is fairly mature.

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Realty Income is a net lease real estate investment trust (REIT). Its primary focus is on single-tenant retail properties, which make up almost 75% of the company's rent roll. A net lease requires tenants to pay most property-level operating costs, which gives the tenant effective control of the property. Realty Income's costs and risk are reduced in this arrangement, so it is happy to oblige.

Realty Income's portfolio contains over 15,600 properties spread across the United States and various countries in Europe. Like Target, Realty Income has a long history of dividend growth behind it. The REIT has increased its dividend for 30 consecutive years.

Image source: Getty Images.

How do Target and Realty Income match up?

Both Target and Realty Income have impressive dividend histories, so there's really no difference on that front. However, Target's dividend yield is around 4.6% while Realty Income's yield is a full percentage point higher at 5.6%. Investors looking to maximize the income their portfolios generate will likely prefer Realty Income.

Both of these companies are offering yields that are near their highest levels in a decade. But Target's dividend yield is also near the highest levels in the retailer's history. So while both companies appear attractively priced today, Target is more likely to interest value-focused investors.

From a dividend growth perspective, Target's annualized dividend growth over the past decade was roughly 8%. Realty Income's annualized growth rate over that span was a much less impressive 3% or so. Dividend growth investors will probably prefer Target, noting again that the current dividend yield is also historically attractive.

The caveat with Target vs. Realty Income

There is one small wrinkle here that investors need to come to grips with before making a final investment decision. Target's business will wax and wane along with customer sentiment around the retailer. In other words, it is subject to consumer trends and that can lead to material pullbacks when Target is off trend. That appears to be at least part of the problem today, though economic uncertainty isn't helping any. It can be a volatile stock to own, with deep downturns like the current one the best time to buy (but also the most difficult time to buy, given the risk that poor performance could end this Dividend King's dividend streak).

Realty Income, on the other hand, owns retail properties that are leased to many different retailers. There will always be some tenants who are excelling and some who are struggling. Overall, however, retailers have to pay the rent if they want to keep occupying a property. That makes Realty Income's business model less prone to big swings. And even when a tenant vacates a property, the property still retains value. Empty properties can be re-leased or sold fairly easily.

For conservative dividend investors, given the above dynamics, higher-yielding Realty Income will probably be the more attractive choice.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income, Target, and Walmart. The Motley Fool has a disclosure policy.