With markets rallying in recent months, it's no surprise that many investors are considering owning more dividend stocks. These investments tend look cheaper than their growth-focused counterparts right now even as they provide immediate income.
An ideal dividend stock brings several factors to the table, including a market leadership position, stellar finances, and decent sales growth. Income investors prize a long track record of annual dividend raises, too.
There's one stock that meets these criteria in spades. It also just announced a head-turning dividend hike for the 2024 calendar year. Let's look at why investors might want to take a closer look at Walmart(NYSE: WMT) as a dividend growth stock right now.
Walmart's yield right now is below average
It's true that Walmart has a relatively low dividend yield today. The 1.3% you'd earn from buying its shares is a little less than the 1.4% average yield of the wider S&P 500. There are significantly higher yields available in the retailing industry, like those on offer from Home Depot (2.5%) and Target (2.6%), for example.
Yet investors have some good reasons to expect Walmart's dividend hikes to accelerate soon, potentially closing the gap with these peers. That's because the company in late February announced a 9% payout increase to roughly triple the growth rate from the prior year. Walmart is sitting on $10 billion of cash right now after generating $15 billion of free cash flow last year compared to $12 billion a year earlier. "We're proud of the team and excited about building on our momentum," CEO Doug McMillon said in a press release.
Walmart is taking advantage of strong earnings
Walmart is growing sales more quickly in recent quarters, with revenue rising 6% year over year in fiscal Q4. That boost included a 4% year-over-year uptick in the core U.S. market, which was powered by 4% higher customer traffic. Peers like Target, on the other hand, are seeing declining traffic as they work to better challenge Walmart's price leadership.
Admittedly, Walmart won't thrill investors with massive growth in the short term. Management is only projecting a sales increase in the range of 3% to 4% in fiscal 2025 as operating income rises by between 4% and 5%. Those gains are coming on top of solid growth in 2024, though, and reflect a second straight year of expanding profitability. Combined with Walmart's surging cash flow, these wins could support much faster dividend growth over the next few years.
What to watch with Walmart stock
Walmart faces some challenges in its goal of speeding growth and increasing direct cash returns, to be sure. It must continue fighting off rivals like Target and Costco Wholesale as both retailers aggressively cut prices. Walmart hasn't yet established a large enough digital advertising segment to impact the wider business, either. Its e-commerce unit has sufficient scale, meanwhile, at over $100 billion of revenue in the past full fiscal year.
It's not clear yet whether Walmart's management team will have the resources and desire to take a more aggressive approach toward the dividend payout, so income investors might want to just watch this stock for now. Consider other industry leaders with more generous payouts, such as Home Depot. The home improvement retailer hiked its dividend by 8% this year and its yield sits about 1 percentage point above Walmart's.
Don't count Walmart out as a dividend growth option, though. Another year of gains in metrics like cash flow, customer traffic, and profit margin might spur a double-digit dividend increase in early 2025.
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Demitri Kalogeropoulos has positions in Costco Wholesale and Home Depot. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, Target, and Walmart. The Motley Fool has a disclosure policy.
