Target vs. Walmart: What's the Better Dividend Stock to Buy and Hold?

Target (NYSE: TGT) and Walmart (NYSE: WMT) are top retail stocks that can give investors a good way to invest in the economy's long-term growth. They can also generate a lot of dividend income for your portfolio. This year, Walmart has been the clear winner in terms of sheer stock performance, generating year-to-date returns of around 75% versus a 9% decline for Target, at the time of this writing.

But for dividend investors, the priorities will be a bit different. While Target is vastly underperforming Walmart today, that may not necessarily be the case for the next 10-plus years, which is how long dividend investors may be thinking about holding on to an investment.

If your priority is a good dividend stock and you're looking at holding on to an investment for the long haul, I'll look at which of these stocks may be the better option for you right now.

Target offers a much higher payout today

When a dividend stock surges the way Walmart has, that shrinks its yield as it means investors will need to pay more money to collect the same dividend. Walmart's yield is right around 1% today, which is below the S&P 500 average of approximately 1.2%. If, however, the stock was trading at the levels it was at to start the year, its yield would be approximately 1.6%.Target, by comparison, yields 3.4%.

To collect a $1,000 dividend from Walmart over the course of a full year, you would need to invest around $100,000 given its fairly low yield. But with a much higher payout, you would need to invest less than $30,000 into Target stock to collect the same level of dividend income.

Both companies have been growing their dividend payments

For dividend investors, a key criteria to consider when evaluating stocks is also the likelihood that they will increase their dividend income in the future, to not just grow the cash flow but to help offset the effects of inflation.

Earlier this year, Target raised its dividend by just under 2%, which marked the 53rd consecutive year which it boosted its dividend. As a Dividend King, Target has established itself as a top dividend growth stock to buy and hold over the years. Walmart is also part of that club, and in February it increased its quarterly dividend by 9%. The big-box retailer has now raised its dividend for 51 straight years.

While the recent increase was larger for Walmart, it's Target which has made the more generous raises over the past decade, doubling its dividend over that time frame.

TGT Dividend data by YCharts

Both dividends look safe and sustainable

Another important metric to consider is the payout ratio, which tells investors just how much of its earnings a company is paying out in dividends. Both of these stocks have payout ratios of less than 50%, with Walmart having a bit more of a buffer than its rival.

TGT Payout Ratio data by YCharts

A lower payout ratio doesn't mean that Walmart's future increases will be larger than Target's. The company may prefer to keep its payout ratio low and manageable, as distributing too much of earnings out to shareholders could drain its cash, which it may prefer to use on its growth strategies, especially as it continues to battle Amazon.

What the above chart does tell investors, however, is that both dividend payments from Target and Walmart are currently safe and manageable, and there is room for more rate hikes in the future.

Dividend investors may want to consider Target

Target has been struggling this year due to underwhelming demand for discretionary products. But as economic conditions improve in the long run, the tide could change. And with Walmart also trading at a far higher valuation (34 times next year's estimated earnings versus a multiple of 13 for Target), it may be more susceptible to a correction, making Target the better value option for investors.

If you're investing for the long haul and dividend income is important to you, then buying shares of Target could be the better move to make today than jumping onto Walmart's already hot bandwagon.