Investing in stocks that pay dividends has its virtues. Payments can provide a regular source of income during various economic times. But you have to dig deeper to determine if the company can maintain its payments. If they are weak, that could indicate problems for the company.
Turning this analysis to individual stocks, two venerable retailers, Walmart (NASDAQ:WMT) and Macy’s (NYSE: M)both pay dividends.
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Which, if any, should dividend-seeking investors consider purchasing?
Most people know Walmart for its low-priced product inventory and ubiquitous retail presence. Its Walmart and Sam’s Club stores and multiple retail websites serve more than 270 million customers worldwide each week.
It is not just a popular shopping destination. Walmart also produces healthy profits. Fiscal third-quarter operating profit, adjusted to eliminate foreign currency translation effects, grew 8% year over year to $7.2 billion. The period ended on October 31.
It produces enough profits to invest in the business and also pay a generous dividend. Walmart generated free cash flow (FCF), or operating cash flow less capital expenditures, of $8.8 billion over the trailing nine months. That far exceeds the $5.6 billion it pays in dividends.
Walmart can certainly afford its dividends. The board of directors also has a history of increasing them, doing so annually for over 50 consecutive years, making the company a Dividend King. Without a doubt it is quite a feat.
However, at the current dividend rate, the stock’s 0.7% dividend yield is lower than the S&P 500‘s (SNPINDEX: ^GSPC) 1.1%. That’s more of a reflection of the stock’s strong performance over the past year. Walmart shares are up 169% (compared to the S&P 500’s 70% gain) over the past three years.
Many people are familiar with the Macy’s brand, but the company has been facing challenges lately. Management implemented its turnaround plan, which includes renovating and closing some Macy’s stores, changing product assortment and focusing on its luxury brands (Bloomingdale’s and Bluemercury).
There is evidence that his plan has proven effective, although it is still in its infancy. The company’s fiscal third-quarter same-store sales (comps) increased 3.4%. This figure measures sales in the property plus license plus market. These include online sales and departmental sales licensed to third parties. The quarter ended on November 1.