It was a rough week for the retail sector, but that doesn’t mean retailers no longer make good investment opportunities. Many of them still offer healthy share price returns in addition to regular dividend growth. Later in this article, I’ll tell you about what I think are three of the top dividend stocks in the retail sector. But first, let me tell you about my latest shopping experience…
Shopping Habits Are Changing—Probably Forever
What was the last article of clothing you bought, and where did you buy it?
The weather is getting warmer here, so I bought a new sundress at H&M (a huge but still private company) over the weekend. I tried on three and bought the one that I liked best—a pretty typical shopping experience.
The benefits of shopping in a store are getting to see, handle and even try on the exact product you’re buying before you get it home.
But there are downsides too—driving or walking to the store, browsing endless racks of clothing, finding your size (or not), waiting in dressing room lines. Presented with an alternative thanks to technology, more and more shoppers are choosing to forgo these hassles for the comfort of shopping online.
And as retailers chase these consumers, shopping online is getting much more pleasant than it used to be. Realizing how important it is to try on shoes, Zappos revolutionized online shoe shopping years ago by offering free returns—spawning dozens of imitators.
Now videos of merchandise are becoming more and more common—making it even easier to get a feel for how shoes or clothes will look in person. I even discovered a website recently where you can virtually “try on” a new pair of glasses using your webcam!
Retailers that were on top of this trend—moving online at the same pace as or faster than their customers—have been able to keep many of those customers. But companies that have been slower to move operations online—offering fewer products, clunky websites and expensive, slow shipping—have seen customers flee to more digital-friendly companies.
Retail Crash! Sell Macy’s (M) and Buy Amazon (AMZN)
This bifurcation all came to a head in the stock market this week, after Macy’s (M), Nordstrom (JWN) and J.C. Penney (JCP) reported earnings that disappointed investors. These three have become the poster children for the old kind of retailer—typically mall-based, and heavily focused on apparel, shoes and accessories. They’ve also been some of the slowest movers in adopting features that attract online consumers—you still have to spend a whopping $99 on Macy’s website to get free shipping on your order.
By contrast, with a $99/year Amazon Prime Membership, you get free, one- or two-day shipping on nearly everything on Amazon’s website (including many of the exact same clothes and shoes you can buy at Macy’s). And in more and more cities, you can get one-hour shipping on hundreds of items available through Prime Now. That’s less time than it takes to drive to the mall, find and try on a dress, and drive back!
Consumers have responded exactly as you’d expect, and online retailers’ sales are soaring, while department stores’ are tanking.
The U.S. Commerce Department reported Friday that retail sales were 3% higher this April than last April. But the growth wasn’t evenly distributed: department store sales declined year-over-year, while online and catalog spending rose 10%—the best growth of any sector tracked by the government.
Once you know this, it’s no wonder that Macy’s stock has fallen 50% in the past year, while Amazon AMZN has risen 66%.
So how can you use this knowledge to your investment advantage?
3 Top Dividend Stocks in the Retail Sector
Amazon may still have a ton of gas left in the tank—the company has just “decided” to start turning a profit, after years of reinvesting every penny it made, so expected earnings growth is stellar. But the stock doesn’t pay a dividend, so it’s not in my universe—yet.
However, there are three top dividend stocks currently in the Cabot Dividend Investor portfolio that are both benefiting from changing shopping habits and paying nice regular dividends.
• A 4.9%-yielding stock in the second-hottest consumer discretionary sector (after online),
• A 1.6%-yielding stock with a very good reason why people keep coming into its stores,
• A 3.0%-yielding retailer that is moving online successfully—so far.
I’ll share the name of the first stock with you today. If you want to know more about the other two, just click here to take out a trial subscription to Cabot Dividend Investor.
So what was the second-fastest-growing retail segment last month? Here’s a hint:
Low gas prices have inspired thousands of Americans to upgrade their rides this year, and autos—particularly gas-guzzling, high-margin SUVs and trucks—are practically flying off the lots.
For my money, the top dividend stock in the industry is General Motors (GM), which is a leader in those big high-margin models, both here and in China (which is actually GM’s largest market). In the latest quarter, GM reported a 3% increase in retail sales, and 4% and 21% increases in sales to commercial and government fleets, respectively. Truck sales rose 19% year over year.
Longer term, GM has partnered with Lyft to become a major provider of the cars used to shuttle around non-car-owning urbanites. And the two companies plan to introduce self-driving taxis within a year, using GM’s Chevy Bolt.
Today, GM is pulling back normally from the multi-month high it hit after earnings, and looks buyable here, right around its 50-day moving average. The stock yields a generous 4.9%, and trades at a rock-bottom P/E of 4.6.
Remember, if you want the names of those other two top dividend stocks in the retail sector, just give Cabot Dividend Investor a shot today.
It’s approachable, affordable and pays off quickly—as long as you follow the advice.
Sincerely,
Chloe Lutts Jensen
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