The Fed just lowered interest rates. My Top Dividend King Stocks to Buy Now.

Objective (T.G.T -0.51%) investors have had a lot to cheer about lately, with the company’s stock up more than 50% since its multi-year low last October. There is reason to believe that lower interest rates could help drive even higher growth.

Even if growth stalls, Target will reward investors with a steady stream of passive income. Target has been the dividend king with dividend increases for over 50 years in a row. The company’s shares currently yield 2.9% – well above that S&P500 dividend rate of 1.3%.

Here’s why Target is the top dividend stock to buy right now.

Target may benefit from lower interest rates

The target has been hit hard by supply chain disruptions and inflationary pressures. It also mismanaged its inventory and did a poor job of predicting consumer purchasing trends. The chart below shows the impact of these industry-wide and self-caused factors on Target’s performance. In particular, 2022 and 2023 have seen 10 years of slow or negative revenue growth and low operating margins.

TGT revenue data (TTM) according to YCharts.

Since then, Target has adjusted its product mix and inventory and continued to expand its Target Circle loyalty program. However, weak consumer spending, particularly in discretionary categories, remains an issue.

Lower interest rates can spur spending by reducing borrowing costs, encouraging shoppers to buy more discretionary goods in addition to low-margin staples such as groceries and household goods. Staples are how Target attracts customers, but its margins depend on people buying goods they don’t need.

Despite the potential benefits of lower interest rates, it is worth understanding why the Fed is adjusting its policy. The Fed has kept interest rates high to discourage spending and cool inflation. The strategy worked, but unemployment has increased over the past few months. Credit card debt remains at record levels, as does relatively affordable housing. The Case-Shiller Home Price Index, the benchmark for U.S. single-family home prices, has continued to increase more than 50% over the past five years. Interest rates on 30-year mortgages have dropped from their highs but are still at a high of 6%.

U.S. credit card debt data from YCharts.

The bottom line is that lower interest rates may help boost consumer discretionary spending, but they won’t automatically solve consumer problems overnight.

High-quality business at a great price

Despite macroeconomic uncertainty, Target stands out as an attractive buy because it has successfully navigated economic downturns and recessions in the past. Raising the dividend every year, regardless of economic conditions, demonstrates Target’s strong balance sheet and profitability. Even during the worst downturn in recent years, Target’s leverage ratios and payout ratio never reached alarming levels.

Today, its payout ratio is just 45.3%. That’s great, because it indicates that less than half of Target’s profits go to paying dividends. A payout ratio between 50% and 75% is generally considered a healthy range for a high-quality company.

Target’s forward price-to-earnings (P/E) ratio is slightly higher than its current P/E ratio, indicating that analysts expect earnings over the next 12 months to be lower than the prior 12 months. Despite the slowdown, Target still has a valuation below historical levels, which means the company’s stock is not overvalued. Target is particularly cheap compared to the S&P 500, which has a P/E ratio of 29.8 compared to just 16 for Target.

The target is built to last

When interest rates are high, high-yield savings accounts and certificates of deposit may be more attractive than dividend stocks for investors whose primary goal is passive income. However, when the profitability of these products declines, the opportunity cost of investing in dividend stocks is lower.

While the stock market is not guaranteed to pay dividends, a Dividend King like Target offers an elite level of reliability. The company has a history of dividend increases, a clear trajectory for future earnings growth, a healthy balance sheet and an acceptable payout.

Investors should watch how Target performs in a lower interest rate environment, manages inventory and what promotions and rewards it offers to members to encourage them to potentially spend more. Another key benchmark is whether the company can continue to expand its operating margin to return to pre-pandemic levels of around 6-8%.

Target may benefit from a lower interest rate environment, but a change in the economic cycle won’t make or break the investment thesis. This makes it worth buying these stocks and holding them for the long term.

Daniel Foelber has no position in any of the companies mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.