The retail sector has historically not the place for income and dividend investors seeking high payouts. The reason is simple: razor-thin margins. Add in the notion that many new retailers are effectively new companies two or three times each year and you can see why it is difficult for this sector to spend too much money paying out shareholders. Good news seems to be coming for retail sector investors. We are seeing increasing evidence of large dividend growth in the quarters (or years) ahead.
This week we saw Limited Brands, Inc. (NYSE: LTD) declare its regular $0.20 dividend, but the retailer also declared a $1.00 special dividend. This regular dividend at $39.80 generates just over a 2% dividend yield as it is. The $1.00 special dividend generates another 2.5% paid out to shareholders.
Our major companies we have looked at for determining that higher dividends are coming is after reviewing the likes of Whole Foods Markets Inc. (NASDAQ: WFM), The Kroger Co. (NYSE: KR), Gap Inc. (NYSE: GPS), Tiffany & Co. (NYSE: TIF), Kohl’s Corp. (NYSE: KSS), Wal-Mart Stores Inc. (NYSE: WMT), and Target Corporation (NYSE: TGT). Another issue is around Abercrombie & Fitch Co. (NYSE: ANF).
Most of you will think of Whole Foods Markets Inc. (NASDAQ: WFM) as an organic and natural foods grocer. Forget that notion. When it comes to how you need to evaluate Whole Foods it should be considered a luxury retail destination. Whole Foods now pays a dividend with a yield under 1.0% and it has the luxury of much higher margins that traditional grocery stores. Since the stock is pricey, look for more dividend increases ahead rather than share buybacks. The company even signaled that it would look at dividend hikes without giving a formal target. The Kroger Co. (NYSE: KR) operates generally on lower margins, yet its dividend yield is about 1.7%. The difference is that Kroger trades at about 13-times expected earnings against about 30-times expected earnings for Whole Foods.
Gap Inc. (NYSE: GPS) is one that we had big ambitions for dividend investors . The growth is stalled and the company is mature. The good news is that the dividend is now north of 2%, but we had expected the dividend to really go up even more. After the company’s last warning was such a blow, it looks like Gap’s “return of capital to shareholders” is likely to continue via share buybacks.