Retail stocks are going strong this year, as illustrated by the respective 29% and 24% gains of the Retail SPDR (XRT) and Market Vectors Retail ETF (RTH).
But don’t let that uptrend fool you — picking individual retail stocks is anything but easy.
When investors pile their money into a company that has to stock and sell the latest fashions, they’re in a sense betting on the whims of picky shoppers. Styles that are in one day can completely change in the blink of an eye. Just look at how Abercrombie & Fitch (ANF) fared in mid-2012, or how far off Chico’s (CHS) remains from its mid-2000s glory days.
Then there’s the expectations game to consider. Some of the best-performing retail stocks so far in 2013 are ones that remain far off their peaks but have managed at least small comebacks, while other companies that are actually “in” must clear a higher bar.
One way to protect yourself from the volatility and question marks of the retail sector is to pick stocks offering dividends. While the specialty retail sector is hardly known for giant payouts, a few companies yield a decent amount of income that can help investors weather the inevitable storms.
American Eagle Outfitters
Dividend Yield: 2.6%
First up, we have brand that was all the rage when I was in high school: American Eagle Outfitters (AEO). Unfortunately, trends change … and that has been reflected in AEO’s share price. The stock traded for nearly $35 back in 2006, but is currently going for under $20.
AEO also is sitting in the red so far this year, in part thanks to a first-quarter drop in earnings and sales.
But that could be the perfect storm. If American Eagle regains momentum, investors would be treated to both stock gains and income — AEO has been rewarding shareholders since 2004, and its current 12.5-cent per share payout yields 2.6%. That dividend would also protect against any small short-term headwinds.
There are other reasons to like American Eagle, though. For one, AEO has no long-term debt vs. nearly $500 million in cash and short-term investments. And the company also is fairly valued; American Eagle is expected to grow earnings by more than 11% annually over the next five years, which is right in line with its current forward P/E.
Dividend Yield: 2.42%
Our second stock boasts a slightly smaller dividend, but much more impressive stock performance of late.
Guess (GES) has handily topped the market so far in 2013, with impressive 36% gains in its pocket. Most recently, the retailer popped in late May after posting an earnings beat, even though profits were down by more than 50% year-over-year.
Of course, the recent upward trend is just a slight reversal to what had been an ugly slide. Guess lost half of its value from late 2010 to late 2012, and still remains 34% off that peak despite its recent run.
The slide was at least slightly padded by Guess’ dividend program — not only did it improve its dividend by 25% to 20 cents in that time, but it also paid out two special dividends of $2.20 in 2010 and $1.40 at the end of 2012. GES’ regular dividend currently yields just more than 2.4%.
One thing to look out for, though: The company’s cash flows have been trending in the wrong direction in the past couple years.
Dividend Yield: 2.6%
Kohl’s (KSS) is the newest kid on the dividend block, just starting its payout the year before last. Still, in that short time, the dividend has improved 40% — from an initial 25 cents in 2011 to 35 cents as of the most recent quarter that translates into a 2.6% yield.
That payout has helped turn a flat performance since Kohl’s first dividend into a slightly positive total return. The end of last year was rough for KSS shareholders, but the stock has made up for it with a market-beating 24% climb so far in 2013.
Meanwhile, the retailer has beat earnings estimates in the past four quarters, including recent better-than-expected numbers that caused Kohl’s to raise its outlook. That’s no guarantee that KSS will continue to outperform, but it helps — and even if it stays flat, that dividend will help shareholders come out a little bit ahead.
As of this writing, Alyssa Oursler was long RTH.