Target Stock Is Up 61%. Is Its 3% Dividend Still Worth Buying?

Quick Read

• Target’s 50-year dividend streak faces pressure as free cash flow fell 26% and the payout ratio hit 60%, leaving little room for raises beyond 1.8%.

• Costco’s $9.39B in free cash flow and Walmart’s 43x earnings multiple show why Target’s 3% yield reflects a discount, not a bargain.

• CFO Jim Lee flagged restarting buybacks in the second half as the clearest signal Target has surplus cash beyond its dividend commitment.

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Target (NYSE:TGT) pays a quarterly dividend of $1.16, or $4.64 annualized, for a forward yield of 3.01%. Shares at $153.37 are up 61.15% this year but still down 27.02% over five years. That five-year decline is why the yield sits so high.

Half a Century of Raises Is on the Line

Chief Financial Officer Jim Lee laid out the priority order on the second-quarter call:

“We first look to invest fully in our business in projects that meet our strategic and financial criteria. Next, we look to support the dividend and build on our more than 50-year record of annual increases.”

Dividend records confirm a higher quarterly payout in every year from 2003 through 2026. The raises have decreased, though. June’s hike was just 1.8%, compared with 2021’s jump from $0.68 to $0.90.

Payout Ratio Math Investors Can’t Ignore

In fiscal 2025, dividends of $4.54 took about 60% of adjusted EPS of $7.57. Take the $1.65 tariff refund out of 2026 guidance of $9.90 to $10.90, and the forward dividend absorbs roughly 50% to 56% of underlying earnings. Lee said Target is balancing the dividend “with our goal of moving towards a 40% payout ratio over time.”

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Cash Flow Is Where the Strain Shows

Free cash flow fell 25.69% to $2.835 billion in fiscal 2025. This year Target plans about $5 billion of capex for new stores and renovations, up from $3.727 billion. If operating cash flow only matches last year’s $6.562 billion, roughly $1.56 billion would be left after capex. First-half dividends alone ran “just over a billion dollars.” Target bought back no stock in the first half, leaving $8.3 billion of authorization unused, and Lee framed any buybacks as limited by its “middle-A credit ratings.”

Ad Sales and Memberships Add a Cushion

Target sells everything from groceries to toys across 2,019 stores. Higher-margin side businesses now matter too: Roundel sells ads to brands, Target Circle 360 is a paid membership, and Target+ is a third-party marketplace. Non-merchandise sales grew over 20%, and Circle 360 revenue rose over 40%.

The challenges are real. SG&A rose 7%, prices were cut on over 10,000 items, and management admitted home and apparel are “not where it needs to be.” Chief Executive Michael Fiddelke said:

“Our goal isn’t one or two quarters of good results. Our goal is sustained profitable top line growth over time.”

How Walmart and Costco Raise the Bar

Walmart (NASDAQ:WMT) yields only 0.79% and trades at 43x earnings, but it raised its annual dividend to $0.99 from $0.94 and bought back $5.1 billion of stock year to date. Costco (NASDAQ:COST) generated $9.39 billion of fiscal 2026 free cash flow on fourth-quarter comps of 9.4%, against Target’s 3.8%. Investors award those peers premium valuations. Target’s higher yield reflects the discount.

Verdict for Income Investors

The streak looks fairly likely to survive. Underlying EPS excluding tariff refunds rose 24% year to date, payout ratios are falling toward management’s goal, and the board keeps the dividend ahead of buybacks. Expect raises near 1.8% rather than growth, with free cash flow staying tight while capex rises. The clearest sign of surplus cash will be whether Target restarts buybacks in the back half, as Lee suggested it could.

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