Target (TGT -2.63%) stock soared during the pandemic as consumer spending jumped, and it was able to capitalize on curbside and online orders. But Target overestimated demand trends, leaving it vulnerable to supply chain and inflation pressures. Target stock fell from over $260 a share in summer 2021 to the low $100 per share range in October 2023.

Target began to show signs of margin improvement in late calendar year 2023, with the stock recovering for most of 2024. But then, Target fell over 22% on Nov. 20 after reporting third-quarter fiscal 2024 results (for the period ended Nov. 2).

At the time of this writing, Target is up less than 4% from its 52-week low.

Investors have been on a rather unpleasant ride with Target in recent years. The company has failed to provide accurate guidance, often catching investors off guard, which resulted in big post-earnings swings to the upside and the downside. However, there are signs that Target is finally finding its footing.

Here are three reasons why Target is a dividend stock worth buying now.

Image source: Getty Images.

1. Target is turning the corner

Target's steady revenue and operating margin improvement are a step in the right direction. However, the company must build on its momentum and get its margins back to its pre-pandemic range of around 6% to 7%.

TGT Revenue (TTM) data by YCharts

In January, Target shared a holiday sales update for November and December. For those two months combined, total sales increased by 2.8% compared to the same period in 2023, while comparable sales rose 2% and digital sales increased nearly 9%. Target saw an uptick in discretionary categories like apparel, toys, beauty, and fragrance, and posted record Black Friday and Cyber Monday sales.

Based on the results, Target updated its fourth-quarter fiscal 2024 guidance (period ended Feb. 1). It now expects a 1.5% increase in comparable sales and full-year adjusted earnings per share (EPS) of $8.30 to $8.90. For context, Target's adjusted fiscal 2023 EPS was $8.94 -- so adjusted earnings are still expected to be down year-over-year.

The good news is that Target's results seem to have normalized, providing the company with a firm base to build upon and ending a bad streak of overpromising and underdelivering.

2. Expectations are low

Target's beaten-down stock price indicates expectations are fairly bleak for fiscal 2025. In fact, Target is down 9.5% in the last month. Walmart (WMT -1.52%), which is coming off a monster 71.9% gain in 2024, fell nearly 10% last week after providing weak guidance for 2025.

Consumer spending has held up well despite higher interest rates. However, tariffs could lead to higher costs and further pressure consumers. Tariffs are a major unknown for retailers like Walmart and Target going into 2025, so the best these companies can do is stay nimble and react as needed.

In its latest quarter, Walmart said e-commerce made up 18% of total sales, up 1,100 basis points compared to five years ago. Walmart's focus on value and convenience has helped differentiate the retailer from its peers.

For Target specifically, investors should watch to see how the company continues to grow its e-commerce business and boost engagement with its Target Circle loyalty program. Target needs to give consumers more ways and reasons to shop in-store and online, especially if consumer spending becomes more strained. It also needs to prove it can navigate industrywide challenges like tariffs.

For now, Walmart is simply a better-managed company with apparent differentiating factors and a track record for overcoming challenges. But that difference is arguably already factored into the valuations of both companies.

3. Target is great value

Target may not be firing on all cylinders, but the stock has become simply too cheap to ignore. As you can see in the chart, Target has a price-to-earnings (P/E) ratio of just 13.2 and a forward P/E of 13.4 -- suggesting earnings are expected to fall slightly over the coming year -- whereas Walmart's P/E is triple Target's, although it is expected to grow faster in the near term.

TGT PE Ratio data by YCharts

What's more, Target's dividend yield has soared to 3.6% while Walmart's is under 1%, making Target a far better passive income play. Both companies have over 50 consecutive years of raising dividends, making them Dividend Kings.

So when it comes to value, dividend yield, and history of raising the payout no matter what the economy is doing -- Target is as elite as it gets.

A top choice for generating passive income

Target certainly deserves a lower valuation than Walmart, but the disparity has gone too far. That being said, Target is in prove-it mode.

Investors often gravitate to Dividend Kings for their predictable passive income. But when a stock is highly volatile, as Target has been in recent years, it takes away some of that reliability. Target must show investors it can navigate ongoing consumer spending and tariff challenges while providing more accurate guidance.

Given how cheap the valuation is, Target stock could do well, even if it does a decent job navigating the macro environment in the coming years. Due to its product mix of discretionary goods and staples, Target is a coiled spring for a recovery in the broader economy. So, there's a ton of upside potential for investors willing to ride out the current slowdown.

Add it all up, and Target is a great high-yield value stock to buy now.