Forget This 9.4% Yielding Dividend Stock: 1 Rock‑Solid Income Stock That's Much Safer

It's easy to see the attraction to Conagra Brands (NYSE: CAG) these days. Income investor jaws will drop at the 9.4% yield. It's a name you know, and since the packaged goods behemoth falls into the consumer defensive category, some might think it's a safe way to score a massive quarterly distribution.

This could be a big mistake. Let's start with the payout. A 9.4% dividend may seem nice to have collected over the past year, but the stock has plummeted 42% in that time. Suddenly, it's not the bargain moneymaker you thought it would be. This high-yielding stock hit a 17-year low this month.

Conagra has problems. Revenue is declining for the third fiscal year in a row. Its operating profit is sliding substantially for the second consecutive fiscal year. Conagra has taken nine-figure goodwill impairment hits in three of the last four years. This is not a good place to be. May I suggest you aim elsewhere for a dividend stock?

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Right on target

Target (NYSE: TGT) is still in the middle of a turnaround, but the market likes what it sees. Target stock has risen 35%, as a new CEO is injecting enthusiasm in the investing community. Conagra has a new leader coming in June, but that will be a trickier situation to remedy.

Inflationary pressures are weighing on both businesses, but Conagra doesn't have the pricing elasticity to pass it along to its customers. Its trailing gross margin is at a 14-year low. Target has seen its gross margin improve in two of the last three fiscal years.

Target is only yielding 3.5%, but that's comparable to what the top-yielding money market funds are paying these days. It's also good for the money. It has boosted its dividend for 54 consecutive years, making it a Dividend King. Conagra stopped hiking its dividend in 2023, and just keeping the current distribution going will be a challenge.

Conagra will barely be able to cover this year's $1.40 a share in distributions with the $1.70 per share that analysts see it earning. Target has a more reasonable payout ratio of 58% based on the midpoint of its bottom-line guidance for this year.

A big Conagra problem right now is GLP-1s and other weight loss drug breakthroughs leaving consumers less hungry. In short, slim Jim isn't going through as many of Conagra's Slim Jims. Target will be just fine. It also sells food, but slimming Target shoppers may also have to update their wardrobe to new sizes in the new normal.

Target is clicking again. It's one of just three S&P 500 stocks with yields above 3% that have risen by at least 30% this year. Conagra is going the other way. If you want to go in the right direction, pay attention to the yield signs.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.