All It Takes Is $2,000 Invested in Walmart and Each of These 2 Dividend Stocks to Generate Over $150 in Passive Income Per Year | The Motley Fool (2024)

Investment objectives vary based on time horizon and risk tolerance. However, most well-diversified investors are probably looking for a balance of growth, income, and value stocks.

When scanning the market for dividend stocks to buy, it's important not to fixate just on yield. Instead, invest in quality companies that have the potential to grow earnings and dividends. After all, a company that doesn't have growth prospects may drastically underperform the market -- and you would have been better off investing in other stocks or a high-yield savings account for income.

Walmart (WMT 0.65%), Target (TGT 1.68%), and Clorox (CLX -0.36%) have increased their dividends every year for decades. Moreover, all three companies have the potential to grow earnings and increase in value over time -- so the investment thesis doesn't revolve solely around passive income.

Investing $2,000 into each stock should produce at least $150 in annual dividend income. Here's why all three dividend stocks are worth buying now.

Walmart could continue producing outsized gains

At Friday's closing price, Walmart yields just 1.2% -- by far the lowest yield of any stock on this list. However, Walmart is a victim of its own success.

When a stock's price outpaces the rate of dividend increases, the yield will go down. Up more than 29% year to date, Walmart is the best-performing component of the Dow Jones Industrial Average -- better than Microsoft, Apple, and other growth stocks.

Walmart is a Dividend King, with over 50 consecutive years of dividend increases. In February, it raised its dividend by 9%, and there's reason to believe the pace of dividend increases will continue to accelerate.

Walmart's fiscal 2025 guidance is decent, but not great, with consolidated net sales expected to increase by at least 4%, consolidated adjusted operating income up at least 6%, and adjusted earnings per share (EPS) of at least $2.37. If that's what Walmart has earned when its fiscal 2025 ends on Jan. 31, today's price would give it a price-to-earnings ratio (P/E) of 28.7.

However, EPS can be misleading if a company has abnormally high, non-recurring expenses that reduce profits, which is exactly the case with Walmart. Its capital expenditures (capex) skyrocketed as it made long-term investments in store renovations, improving its e-commerce Walmart+ delivery program, and more. These expenses won't immediately translate to profits. However, we could begin to see capex make up a lower percentage of sales starting next fiscal year, which should boost margins.

Short-term-minded investors may scoff at Walmart's mere 33% payout ratio and wonder why the company doesn't allocate more profits toward dividends. While Walmart could afford to pay a much larger dividend, it may benefit investors even more in the long term if it allocates capital effectively. Over the last 12 months, Walmart spent $20.85 billion on capex -- a whopping three times the dividend expense. Walmart is in growth mode, so buying the stock is more about where the business (and, in turn, the dividend) is headed rather than where it is today.

Walmart isn't an exciting company, but this is an exciting time to be a Walmart investor, especially if it can continue making progress with curbside pickup and delivery.

Target is finding its footing

In June, Target increased its dividend for the 53rd consecutive year to $1.12 per share per quarter. However, it was just a 1.8% increase from the prior quarterly dividend. When companies barely raise a dividend just to keep a streak alive, it can be a sign that growth is slowing.

In Target's case, a small dividend raise was probably the right call. This chart will give some clues as to why.

TGT Revenue (TTM) data by YCharts

In the fiscal year that ended Jan. 30, 2021, Target had a record high EPS of $14.10 as consumer spending soared during the worst of the COVID-19 pandemic. Following the strong year, Target raised its dividend by 20% in June 2022, which, in hindsight, was a bit overzealous. Target would go on to have one of its most disappointing years in recent history as supply chain challenges paired with overestimated demand led to poor results.

Since then, sales growth has stagnated and margins are down. Target has recovered from the worst of its margin compression, but the business isn't exactly firing on all cylinders. For the full year, Target is guiding for just 0% to 2% in same-store sales growth and $8.60 to $9.60 in EPS. At the midpoint, that would be less than 2% earnings growth.

Target hasn't been a consistent business over the last few years. The volatile stock price reflects the ebbs and flows in investor sentiment. However, going forward, Target stands out as a quality value stock to buy now. The payout ratio is under 50%, indicating that Target can easily afford its dividend. The dividend yield is a sizable 3.3% -- much higher than Walmart, for example. Target isn't growing at the pace investors are used to, but the P/E ratio is just 15.2, which is dirt cheap.

Add it all up, and Target is a solid dividend stock to buy now, especially if it can return to more consistent growth.

Clorox is getting its costs under control

Like Target, Clorox has been in recovery mode in recent years. Clorox experienced a surge in demand early in the pandemic. Management was confident that hygiene habits would stick even post-pandemic. But that didn't exactly go as planned. In fact, Clorox grossly overestimated demand, was hit by supply chain challenges, inflation, and then --- to top it all off -- a cyberattack that severely impacted the company in 2023. Needless to say, it has been far from business as usual at Clorox.

As you can see in the chart, Clorox's sales, general, and administrative expenses have grown faster than revenue. After spiking in 2020, operating income has been down over the last five years due to sluggish top-line growth and high expenses.

CLX Revenue (TTM) data by YCharts

The good news is that Clorox seems to have found a better balance -- arguably for the first time in four years. Clorox just reported its fourth-quarter and full-year results for its fiscal 2024, which saw higher gross margins and better cost management. Its fiscal 2025 guidance calls for just 0% to 2% increase in net sales but a 100-basis-point increase in gross margin and adjusted earnings per share of $6.55 to $6.80 -- an increase of 6% to 10%.

Clorox is doing better, but not great. However, like Target, the stock price already reflects the company's challenges -- with Clorox currently down from where it was pre-pandemic.

On July 30, Clorox raised its quarterly dividend from $1.20 to $1.22 per share, a marginal increase. But it sustains a dividend streak that dates back to 1984.

With a yield of 3.4%, Clorox is another company that is making progress on its turnaround and can reward patient shareholders with a generous amount of passive income.