3 Retail Stocks That Could Increase Their Dividends

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In today's era of stiff competition from low-price, online retailers, maintaining a dividend might seem like a pipe dream for traditional brick and mortar retailers. Still, despite the emerging challenges that they face, there are a handful of retailers that look capable of not just maintaining their dividends, but also increasing them.

The three retailers listed below not only have increased their dividends in the recent past, but they're positioning themselves for a good chance at future dividend growth, too. The key traits they share that put them in that enviable position include a solid corporate financial position and a stronger-than-normal moat protecting them from that intense competitive onslaught.

Retailer No. 1: A titan in the home improvement business

Home Depot (NYSE: HD) is the world's largest home improvement retailer, and that particular construction titan has figured out ways to build a pretty resilient moat against the online onslaught. Key moat drivers include:

  • The company's strong contractor support program,
  • The old adage that Do-It-Yourself projects frequently require multiple trips to the store, and
  • The challenges involved in parcel-shipping so much of what's needed in home improvement.

Buoyed by that competitive benefit helping keep the online competition somewhat subdued, Home Depot has been able to keep increasing its dividend in recent years. What makes Home Depot look capable of continuing to increase its dividend include the following key factors:

  • Its payout ratio of around 43% of earnings is low enough that it has room to keep increasing it without jeopardizing its ability to adequately support its operations.
  • Its current ratio of around 1.25 is high enough that it looks capable of paying its near term obligations without putting its ability to pay that dividend in jeopardy.
  • Its expected earnings growth rate of around 14% over the next five years indicates it has a decent path forward to support a higher dividend over time with stronger cash flows.

Retailer No. 2: A giant among grocery chains

Kroger (NYSE: KR) is one of the world's largest grocery retailers, operating nearly two dozen banners in addition to its namesake. Kroger's moat includes its strong local and service oriented focus, the difficulty that online retailers have had with cost-effectively delivering perishables, and the buying power that comes from its size.

Kroger has also been able to regularly increase its dividend recently, including its August 2016 payment, and it too provides signs that it will be well positioned to continue that trend. For instance, Kroger's payout ratio is less than 20% of its earnings, giving it ample room to continue its increases, even if its business doesn't rapidly grow. In addition, with a debt to equity ratio below two to one, Kroger's balance sheet leverage isn't heavy enough to put its dividend at a substantial risk of being cut in order to service its debt costs.

In addition, Kroger is expected to be able to increase its earnings by a touch more than nine percentage points annually over the next five years. For a company to sustainably increase its dividend over time, it needs the earnings and cash to be there to support those increases, and Kroger's projected growth looks capable of supporting that.

Retailer No. 3: The biggest of them all

As the world's largest retailer, Walmart (NYSE: WMT) has the biggest target on its back when it comes to what the online retailers are aiming at. Still, being the largest also gives Walmart the most resources to protect and even find ways to improve its business over time. For instance, few other retailers could have shelled out over $3 billion for e-commerce start-up retailer Jet.comto take the fight to other online retailers the way Walmart just agreed to do.

In addition, as the Walton family still owns a controlling stake in Walmart, the company isn't as beholden to Wall Street and its short term mentality as other retailers might be. That gives it the ability to build for the longer term, which is a huge asset when its primary online competition is also willing to heavily invest for the future rather than simply seek to maximize the current quarter.

From a dividend perspective, Walmart currently pays out $0.50 per share per quarter, which represents about a third of its earnings. It has a decent history of past dividend increases and that reasonably low payout ratio gives it room to continue increasing its dividend over time as its business grows. In addition, with a fairly low 0.7 debt to equity ratio, Walmart is at low risk of having to cut its dividend to cover its debt payments at any time in the near future.

Over time, of course, no company can sustainably increase its dividend faster than its earnings grow. From that perspective, Walmart's anticipated growth of around 2.4% over the next five years may not seem like much, but it is anticipated growth, despite the online onslaught. And in the end, that's what ultimately gives Walmart the opportunity to continue its trend of dividend increases.

There's still room for increasing dividends in retail

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Despite the challenges of operating and growing a bricks and mortar retail business in this era of online competition, Home Depot, Kroger, and Walmart have proven themselves capable of success. Their dividends have continued to increase despite the changing landscape, and their current strength gives them the agility to continue to adapt with the times. While there are no guarantees in investing, all three of these retailers look capable of continuing their trends of increasing their dividends.

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Chuck Saletta's wife owns shares of Kroger. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.