Is Target Stock's High Yield Worth It in 2025?

With volatility returning to the markets this year, safer dividend stocks with high yields are looking more attractive. Target (NYSE: TGT) stands out as a potential investment option, largely because of its 57-year record of paying (and annually increasing) dividends. It currently sports an attractive 4.83% forward yield based on its current quarterly payment of $1.12. This is the highest yield Target stock has ever offered in its trading history.

But even with its stellar dividend yield, the stock price has fallen 65% from its 2021 highs over concerns about inconsistent sales performance. Let's take a closer look at the reasons why the stock might be worth buying, and what challenges it faces.

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Why the stock could be undervalued

Target stock trades at a cheap valuation of just 10 times forward earnings estimates. The combination of a high dividend yield and low earnings multiple looks very attractive and could set up handsome gains over the next few years.

The company posted a 1.5% increase in comparable sales in the fourth quarter. Online sales channels were a key driver, with sales through same-day delivery powered by Target Circle 360 increasing over 25% year over year.

Target is aiming to add $15 billion to its $106 billion in annual sales over the next five years. It will invest in stores, supply chain, and technology, which implies management is also focused on improving efficiency. This would benefit long-term earnings growth and support a growing dividend.

Target entered the year in a solid enough position to increase the dividend again this year. Target is only paying out half of its earnings in dividends, so it's got plenty of wiggle room to manage the payout even if a recession in the economy causes a shortfall in sales and earnings.

But there are downsides to Target that investors should consider before buying shares.

Target is not the most recession-resilient retailer

Target says it has an experienced team in place to navigate the uncertainty with tariffs. But it's also worth noting the risks that Target faces if the economy sinks into a recession.

The stock has fallen sharply because it is not growing sales at the same rate as its competitors. Walmart's U.S. business and Costco Wholesale posted a same-store sales increase of around 5% or better in the holiday quarter, which is much stronger than Target's 1.5% increase.

Target generates close to half of its sales from categories that are vulnerable to weakened consumer spending. Sales of apparel, hardlines (e.g. electronics and toys), and home furnishings are down from 2022 sales levels. These categories made up over 45% of Target's sales last year.

There are other high-yield stocks I would consider buying before Target. Two that come to mind are Coca-Cola and Johnson & Johnson. These companies sell products that can generate more steady sales in a recession, which is why these dividend stocks are trading up year to date, while Target stock is down.

Higher costs from tariffs on imported goods could ding Target's earnings, and that's before considering any costs Target may pass on to the consumer, which could result in lower sales. Sure, Target can probably navigate through the tariffs OK, as it has before, but investors could be in for a bumpy ride.

The upside for investors could be very rewarding if everything works out with tariffs and the economy. But given the risks, it's also likely the stock could underperform to the point where investors don't make any money, including the dividend return, over the next few years. Target just looks too exposed to softline categories like apparel and electronics, which are already causing its sales to grow slower than competitors. This exposure has dragged its share price down, and with the fluid tariff situation, investors might be better off investing in a dividend stock of a more resilient business.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.