Meet the Dividend King Down 28% in 2025 That Has a Lower Payout Ratio and a Higher Yield Than Coca-Cola and PepsiCo

Dividend stocks add a passive income element to a financial portfolio rather than relying solely on potential capital gains to drive returns. High-yield dividend stocks can generate even more passive income. However, dividends are only as reliable as the company that pays them. So chasing high yields from companies with deteriorating investment theses is a bad idea.

A better approach is to focus on quality companies at reasonable values that can afford their current payouts and have a runway for supporting future dividend raises.

Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP) are two well-known dividend stocks that are so consistent they've boosted their payouts for 63 and 53 consecutive years, respectively.

Target (NYSE: TGT) sports a mouth-watering 4.5% dividend yield and has raised its payout for 53 consecutive years. Coke, Pepsi, and Target all qualify as Dividend Kings -- companies that have paid and raised their dividends for at least 50 years.

However, Target has struggled in recent years with low-single-digit sales declines and falling operating margins. Despite Target's weak results, it is a safer dividend stock than Coke and Pepsi by a key metric.

Here's why income investors may want to take a closer look at Target in 2026.

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Target's sizable and affordable dividend

Some Dividend Kings routinely raise their payouts by mid-to high-single digits, whereas others make very small dividend increases just to maintain their regal status. Target has done just that with less than 2% dividend raises for three consecutive years. However, some context is in order.

Target's results have been poor, and it doesn't want to make the dividend expense too high to the point where it gobbles up all of its excess earnings. Plus, Target raised its dividend by a staggering 20% in 2022. Therefore, the recent low increases are smoothing out that outlier instance.

Target has a dirt-cheap valuation, trading at just 14 times forward earnings compared to 16.3 for Pepsi and 21.1 for Coca-Cola. But above all else, what makes Target such a compelling turnaround stock for income investors is that its dividend sports a high yield and is affordable. Despite declining sales, Target is still generating a substantial amount of earnings and free cash flow (FCF).

Target's payout ratio is just 54.8%, which is healthy. The payout ratio is the dividend per share divided by earnings per share. So a payout ratio of 50% would mean the dividend is soaking up half of earnings, whereas a ratio topping 100% is dangerous because it means a company is paying more dividends than it is booking in earnings.

Coca-Cola is often viewed as one of the safest Dividend Kings, but it has a payout ratio of 66.7%. And Pepsi's is now north of 100%.

TGT Payout Ratio (TTM) data by YCharts.

It's also worth noting that Coke and Pepsi's dividends are higher than their FCF per share, whereas Target is raking in nearly 50% more FCF than its dividend expense. Granted, FCF and earnings can fluctuate based on capital spending plans and accounting practices. Still, given the narrative that Target is in a deep turnaround, investors may have expected its payout ratio to be elevated and its FCF to be at or below its dividend expense. In reality, Target's sales growth is slowing, but it remains a highly profitable company.

Target is a great buy for patient income investors

Target is an excellent example of the nuances that come with dividend investing. Yes, its recent raises have been minimal, but it's impossible to ignore the monster 20% increase in fiscal 2022.

And while Target's earnings growth is languishing, its payout ratio is so low that its dividend is arguably healthier than some of the safest dividend stocks on the market. And because Target's yield is already high and the stock price is down so much, Target could simply raise its dividend by the earnings growth rate and still be a solid source of passive income even if it only grows earnings by low-to-mid-single digits in the near term.

If Target can reignite the in-store shopping experience with a revamped product lineup and renovations, it could help restore its brand. But given the damage, it could take some time even if there's a recovery in consumer spending.

Target is a better cash cow and has a more attractive dividend than Coke and Pepsi, which yield 3% and 4.1%, respectively. But some investors may still prefer Coke and Pepsi over Target.

Coke and Pepsi have diverse portfolios of leading brands, with Coke specializing in non-alcoholic beverages and Pepsi also playing heavily in that category, plus snacks and mini meals. Coke and Pepsi are more dependent on international markets, whereas Target is exclusively in the U.S.

So, for investors concerned about U.S. consumer spending on retail, Target may still be worth passing on even though its valuation is low and its dividend is rock solid.

Daniel Foelber has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.