Dividend investors who have narrowed their choice down to McDonald's (NYSE: MCD) and Target (NYSE: TGT) and can't decide between them have come to the right place. If there ever were a problematic comparison, this is it.
McDonald's and Target are excellent businesses that have made shareholders wealthy. Nevertheless, below is a look into which stock is a better buy for income investors. If you are still on the fence at the end of this article, you can always split your desired purchase in half and buy both McDonald's and Target.
Image source: Getty Images.
Target
Target has long had success as a retailer, and the onset of the pandemic only elevated its momentum. Deemed an essential retailer and allowed to stay open while some businesses closed, it took advantage of increased customer demand. Impressively, it handled the surge in demand without trouble, a feat not as easy as it sounds.
The increase in sales has boosted profits to record levels. Earnings are crucial when considering dividends. Without sufficient profits, dividend payments are unsustainable. Target is in good shape, with earnings per share rising to $14.10 in 2021, up from $4.52 in 2013. Rising profits have allowed Target to increase annual dividend payments per share from $1.32 to $3.16 in that same time.
Even though Target has expanded the dividend, it is doing so responsibly. Its dividend payout ratio, which measures the percentage of earnings paid out in dividends, was 22.3% most recently. Even with an earnings decrease, Target can sustainably pay its dividend.
TGT Payout Ratio data by YCharts
Moreover, Target management has made intelligent capital investments, preparing it to serve consumer demand through various channels. These investments make it likely Target will continue to thrive in the following years.
McDonald's
McDonald's is bouncing back from pandemic disruptions stronger than ever. Unlike Target, it was initially hurt by government-mandated closures of in-person dining. However, the shutdowns forced McDonald's to lean aggressively toward digital ordering, and the move is paying off.
After falling by 10% in 2020, sales jumped by 21% in 2021. Additionally, McDonald's reported earnings per share of $10.04 in 2021, a record high for the company, and up from $5.36 in 2012. McDonald's dividend has steadily increased over the years, culminating at $5.25 per share for the full year in 2021. Most recently, McDonald's boasted a dividend payout ratio of 56%.
MCD Payout Ratio data by YCharts
Like Target, McDonald's management has made excellent capital investments and strategic decisions that will likely pay off for several years. Digital ordering for food delivery, in particular, expands the geographic reach of each McDonald's restaurant and increases the potential for revenue and profits.
The verdict
MCD PE Ratio data by YCharts
Overall, Target and McDonald's are excellent dividend stocks that will likely make shareholders wealthier over the long term. However, if you had to choose only one, it should be Target. It has a lower dividend payout ratio, meaning it has more room to increase the payment, and it is trading at a cheaper valuation than McDonald's.
10 stocks we like better than Target
When our award-winning analyst team has 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.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Target wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of April 7, 2022
Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
