Will Healy, The Motley Fool

Sat, Jun 21, 2025, 1:25 AM5 min read

• Target stock offers a dividend yield of almost 4.8%.

• Its stock is down nearly 65% since 2021 amid a variety of challenges.

• The company's dividend stability likely comes down to the strength of its free cash flow.

• 10 stocks we like better than Target ›

When it comes to income investing, many investors will turn to Dividend Kings. These stocks have increased their payouts every year for at least 50 years, drawing investors with their decades-long track record of stability.

Of those stocks, Target (NYSE: TGT) has drawn attention for its relatively high yield. However, that dividend return has risen amid sales declines from a sluggish economy and public relations missteps. That leaves investors to figure out whether they should dismiss the company's challenges and pursue that yield, or stay away.

Indeed, it is hard not to like Target on the surface. The footprint of nearly 2,000 stores across all 50 states bolsters the company and is a key competitive advantage. With more than 75% of the U.S. population within 10 miles of a Target location, only Walmart can surpass its ability to combine in-store and online retailing.

That presence has helped support a lucrative dividend. Amid its recent payout hike, the company now pays investors $4.56 per share annually, a dividend yield of just under 4.8%. Considering the S&P 500's average yield of approximately 1.3%, Target stock could draw investors primarily for its payout.

Moreover, in fiscal 2024 (ended Feb. 1), Target generated almost $4.48 billion in free cash flow, well above the $2.05 billion dividend costs, so longer-term data show Target maintains a sustainable payout. Also, the recent dividend increase has given Target a 54-year history of payout hikes, maintaining its place as a Dividend King.

Admittedly, such a status does not negate its right to reduce or eliminate the payout in theory. Nonetheless, such a move would likely undermine confidence in the stock, as evidenced by the history of other companies that abandoned decades-long dividend increase streaks.

With its challenges, Target's stock is down by nearly 65% from its 2021 high. But even with its rock-bottom 11 P/E ratio, a dividend cut would probably lead to further stock selling, a scenario management likely wants to avoid.

However, investors may need to accept some risks and watch free cash flows. Despite its positive free cash flows in 2024, Target reported $515 million in negative free cash flow in the first quarter of fiscal 2025 (ended May 3), a time when it also had to pay $510 million in dividends.