As a brutal selling environment has pressured shares, many retailing stocks are offering income investors unusually high yields today. However, there's no point owning a generous dividend stock only to see it sliced as a company is forced to save cash. A strong yield isn't much protection from a collapsing share price, either.
Below we'll highlight a few retailers that, while boasting a yield that's at least twice as big as the broader market, stand a good chance to post improving, or at least steady, operating results. Read on to find out why Target (NYSE: TGT), Macy's (NYSE: M), and GameStop (NYSE: GME) might make solid income investments today.
Continue Reading Below
Target: 4.2% yield
The 18% dive in Target's shares this year has sent its dividend yield just above 4%. Yet the retailer is enjoying improving operating results right now. Comparable-store sales grew by 1.3% in the second quarter to mark a solid increase over the prior quarter's 1.3% decline. Both of those results were above management's guidance.
Notably, Target's latest revenue gain was powered by healthy customer traffic, which is something the retailer will need to maintain to protect market share over the holiday shopping season. In any case, income investors don't have to worry about an impending dividend cut. Target has raised its payout for 46 consecutive years, and its dividend commitment is currently below 50% of earnings. The company's latest forecast, meanwhile, calls for comps to be roughly flat for the full year as price cuts send adjusted profit down to between $4.35 per share and $4.55 per share from $5.01 per share in 2016 .
GameStop: 7.3% yield
GameStop is the specialty retailer that most of Wall Street loves to hate. Despite constant comparisons to Blockbuster, though, the company appears to be navigating the transition to digital gaming. Comps ticked higher last quarter as the company enjoyed a traffic spike from the launch of Nintendo's new game console. Sure, gross margin declined as low-margin hardware sales took the place of GameStop's highly profitable, but shrinking, pre-owned game segment.
However, the retailer's newest business lines -- including collectibles and consumer electronics -- helped protect earnings, and net income just slipped from 1.7% of sales to 1.3 %.
GameStop's head-turning 7% yield is well-protected by cash flow. The retailer is also a slightly more risky bet at the moment, given that a huge proportion of its annual sales and earnings are generated over the holiday shopping season. CEO Paul Raines and his executive team are predicting a flat annual result, but the slumping stock price suggests investors fear a surprise slowdown that could torpedo 2017 results over the next few months.
Macy's: 6.8% yield
Macy's is deep into what seems sure to be its third straight year of declining comps. The wheels aren't falling off this iconic retailing business, though. In fact, executives recently affirmed full-year guidance that calls for comps to dip by between 2% and 3%, compared to a 2.9% slump in 2016 .
Cash flow isn't a problem, either, with the business generating $900 million of free cash flow last year, easily covering the $459 million it paid in dividends. Macy's is augmenting that financial strength by selling off pieces of its valuable real estate portfolio, and that move might contribute to impressive gains for long-term shareholders -- assuming its core business begins to expand again in 2018.
Given their sluggish sales momentum, an investment in any of these retailers is risky, especially heading into a holiday season that might bring unprecedented disruption to the industry as shoppers embrace e-commerce spending. Risk-tolerant income investors can get paid well for that exposure, though, in the form of protected dividends and a decent chance that these retailers will outperform Wall Street's low expectations.
10 stocks we like better than Macy'sWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Macy's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of September 5, 2017
Demitrios Kalogeropoulos owns shares of GameStop. The Motley Fool owns shares of GameStop and has the following options: short October 2017 $22 calls on GameStop. The Motley Fool has a disclosure policy.