All you need is $2,000 invested in Walmart and each of these two dividend stocks to earn over $150 in passive income per year

Investment objectives vary depending on investment horizon and risk tolerance, but most well-diversified investors are likely looking for a balance between growth, income and value stocks.

When scouring the market for dividend stocks to buy, don’t just focus on yield. Instead, invest in quality companies that have the potential to grow earnings and dividends. After all, a company with no growth prospects can significantly underperform the market – and you would have been better off investing in other stocks or a high-yield savings account to generate income.

Walmart (WMT 0.43%), Goal (TGT 1.14%)And Clorox (CLX -0.90%) have increased their dividends every year for decades. In addition, all three companies have the potential to increase their earnings and value over time – so the investment thesis is not just about passive income.

If you invest $2,000 in each stock, you should earn at least $150 in annual dividend income. Here’s why all three dividend stocks are worth buying now.

Image source: Getty Images.

Walmart could continue to make disproportionate profits

As of Friday’s closing price, Walmart yields just 1.2% – by far the lowest yield of any stock on this list. But Walmart is a victim of its own success.

When a stock’s price exceeds dividend increases, the yield falls. With a share price increase of over 29%, Walmart is the best performing component of the Dow Jones Industrial Average — better than Microsoft, Appleand other growth stocks.

Walmart is a dividend king, having increased its dividend for over 50 consecutive years. In February, the company raised its dividend by 9%, and there is reason to believe the pace of dividend increases will continue to accelerate.

Walmart’s guidance for fiscal 2025 is decent, but not great. Consolidated net sales are expected to grow at least 4%, consolidated adjusted operating income is expected to grow at least 6%, and adjusted earnings per share (EPS) is expected to grow at least $2.37. If Walmart earns that much by the end of fiscal 2025 on Jan. 31, that would give it a price-to-earnings (P/E) ratio of 28.7 at today’s price.

However, earnings per share can be misleading when a company has unusually large, one-time expenses that reduce profits, which is exactly the case with Walmart. Its capital expenditures (capex) soared as the company made long-term investments in store renovations, improving its Walmart+ e-commerce delivery program, and more. These expenses won’t translate into profits immediately. However, starting next fiscal year, capital expenditures could be a smaller percentage of sales, which should boost margins.

Short-term investors may scoff at Walmart’s payout ratio of just 33% and wonder why the company doesn’t spend more of its earnings on dividends. While Walmart could afford to pay a much higher dividend, over the long term it could reap even greater benefits for investors by using its capital effectively. Over the past 12 months, Walmart has spent $20.85 billion on capital expenditures — three times what it spent on dividends. Walmart is in growth mode, so buying the stock depends more on where the company (and thus the dividend) is headed than where it is today.

Walmart is not an exciting company, but it is an exciting time to be Walmart investors, especially if the company continues to make progress in curbside pickup and delivery.

Target finds its way

In June, Target increased its dividend for the 53rd consecutive year, to $1.12 per share per quarter. However, this was only a 1.8% increase from the previous quarterly dividend. When companies barely increase their dividend to maintain a winning streak, it can be a sign that growth is slowing.

In Target’s case, a small dividend increase was probably the right decision. This chart gives some clues as to why that is.

TGT Sales (TTM) data from YCharts

In the fiscal year ended January 30, 2021, Target had record earnings per share of $14.10 as consumer spending soared during the worst of the COVID-19 pandemic. Following the strong year, Target increased its dividend by 20% in June 2022, which in hindsight was a bit overzealous. Target endured one of the most disappointing years in its recent history as supply chain challenges coupled with overestimated demand led to poor results.

Since then, sales growth has stagnated and margins have fallen. Target has recovered from the worst of the margin decline, but business is not exactly running at full speed. For the full year, Target expects sales growth of just 0 to 2 percent in existing stores and earnings per share of $8.60 to $9.60. On average, that would be earnings growth of less than 2 percent.

Target hasn’t been a consistent company in recent years. Its volatile share price reflects swings in investor sentiment. Going forward, however, Target stands out as a high-quality value stock to buy now. Its payout ratio is under 50%, suggesting Target can easily afford its dividend. Its dividend yield is a respectable 3.3% — much higher than Walmart, for example. Target isn’t growing at the pace investors are used to, but its P/E ratio is just 15.2, which is dirt cheap.

Overall, Target is a solid dividend stock to buy now, especially if the company can return to more consistent growth.

Clorox gets its costs under control

Like Target, Clorox has been in recovery mode for the past few years. Clorox experienced a surge in demand at the beginning of the pandemic. Management was confident that hygiene habits would continue after the pandemic. But that didn’t quite go according to plan. In fact, Clorox grossly overestimated demand, was hit by supply chain issues, inflation, and then – to top it all off – a cyberattack that hit the company hard in 2023. Needless to say, Clorox has been anything but normal.

As you can see in the chart, Clorox’s selling, general and administrative expenses have been growing faster than revenue. After a steep increase in 2020, operating income has declined over the past five years due to sluggish revenue growth and high costs.

CLX Volume (TTM) data by YCharts

The good news is that Clorox appears 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 fiscal 2024, which showed higher gross margins and better cost management. Fiscal 2025 guidance calls for only a 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 — a 6% to 10% increase.

Clorox is doing better, but not great. However, like Target, its stock price already reflects the company’s challenges – Clorox is currently below pre-pandemic levels.

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

With a yield of 3.4%, Clorox is another company making progress in turning the tide and can reward patient shareholders with generous passive income.