Dividend stocks are great for generating a steady stream of income. Most public corporations that pay a dividend do so at regular intervals like quarterly or semi-annually. And once dividends are established, companies are hesitant to cancel or reduce them because they understand that investors are relying on those payments.
If you are looking to invest in dividend stocks, here are my top two for February.
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Target
Target (TGT -0.70%) has such an excellent history of paying dividends that it qualifies as a Dividend King. That is a company that has paid and increased its dividend for 50 consecutive years.
In the last decade alone, Target has increased its dividend per share from $1.10 to $2.68. That means dividend investors in Target in 2012 are getting more than twice the dividends per share they started with.
Moreover, Target has plenty to room to keep increasing that dividend. Target's most recent dividend payout ratio was just 21.5%. Dividends are paid out from earnings; a company can decide what portion of profits it wants to pay in dividends and how much to keep to reinvest in the company. A dividend payout ratio of above 100% is not sustainable in the long term. Even at a payout ratio of just 21.5%, Target boasts a dividend yield of 1.43%.
Target's dividend yield dropped since 2019 because of the rapid rise in its stock that's more than tripled since then. Still, Target's stock is trading at a price-to-earnings ratio of 16, leaving room for stock price appreciation to continue.
eBay
eBay (EBAY -0.14%) does not have a long history of paying dividends like Target; eBay only started paying a dividend in 2019. However, eBay has the potential to be an excellent dividend stock, primarily because the company runs on an asset-lite business model. eBay has built a platform that brings buyers and sellers together and takes a percentage of each transaction. It does not spend money building and maintaining brick-and-mortar stores or accumulating inventory.
That means eBay can eventually and sustainably carry a higher dividend payout ratio. Most recently, that payout ratio was only 3.76%, but there is a likelihood eBay will increase that over time. Already, eBay raised its dividend per share from $0.56 in 2019 to $0.64 in 2020. That's an increase of 14.3% and good for a dividend yield of 1.13%.
What's more, eBay has grown earnings per share at a compounded annual rate of 19.2% in the last decade. Recall, dividends are paid out of earnings, and the robust earnings growth could fuel dividend growth over time.
Fortunately for investors, eBay is selling at a forward price-to-earnings ratio of 14. A meager dividend payout ratio, double-digit earnings growth, and an inexpensive valuation make eBay an excellent dividend stock to buy in February.
