Dividend Growth: Wal-Mart Vs. Target Vs. Ross Stores

Wal-Mart (WMT) is one of the most respected dividend growth stocks out there. It has increased its dividend each year since 1974 and certainly deserves its status as a safe dividend growth stock. However, other comparatively newer companies are catching up with Wal-Mart in terms of investment interest. Target (TGT), often viewed as a competitor for Wal-Mart, has also been paying increasing dividends since 2003. Recently, Ross Stores (ROST) has also caught the attention of dividend growth investors and rightly so.

This article presents the dividend basics of these three companies and extrapolates the returns over 10 years for investors who can set their money aside in these 3 companies. ROST is not a direct competitor of either WMT or TGT but it still fits into the "service store" category.

WMT's current yield is the highest at 2.5%. TGT comes close at 2.1% while ROST yield slightly below 1%.
WMT's payout ratio is 35%, TGT's is 28%, while ROSS has the lowest payout ratio of 18%. All three numbers are pretty good and should give investors the confidence in these companies' potential to maintain their dividend growth.
WMT's average dividend increase over the past 5 years has been 12%, TGT's at 20% while ROST has recorded a stunning 30% increase.
Since WMT is considered the safest of these three stocks, the table below uses 10% annual dividend increase, which closely resembles its average 12% increase over the past 5 years.
Since TGT and ROSS do not yet enjoy the same status as WMT and it might be difficult to maintain their existing 20% and 30% annual increase, the table below uses 15% and 22% respectively
Let us take WMT as an example. Though the current yield is just about 2.5%, the table shows how an annual 10% dividend increase would almost triple your future yield in original cost, assuming one buys it at today's price level of $64.
The other two tables for TGT and ROST have also been constructed using the same logic, but for higher dividend growth rate as mentioned above.
DRIP has been left out as some investors participate in it and some do not. Some DRIP when the stock price dips and opt out when the price rises above their average buying price.
The table shows even a monstrous dividend growth rate would just about make the returns on ROST slightly greater than WMT's.
However, if TGT were to grow its dividend at the assumed rate, it would comfortably be ahead of WMT from the 4th year of the cycle.
Our Take: When we started this exercise, we fully expected the returns on TGT and ROST to handsomely beat WMT's based on the recent dividend growth history of all three companies. However, WMT's higher current yield and a decent prospective dividend growth rate has proved otherwise. Also, given WMT's stable business and safety, we would suggest investors to stick with WMT if they want to pick just one out of these companies. But that doesn't make ROST or TGT bad picks either as the tables below show.