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

Investment objectives vary by time horizon and risk tolerance. However, most well-diversified investors are likely looking for a balance between growth, income and value stocks.

When scanning the market for dividend stocks to buy, it’s important not to focus solely 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 drastically underperform the market — and you’d be better off investing in other stocks or a high-yield savings account for income.

Walmart (WMT 0.43%), Aim (TGT 1.14%)and Clorox (CLX -0.90%) they have increased their dividends every year for decades. Additionally, all three companies have the potential to grow revenue and increase value over time — so the investment thesis doesn’t just revolve around passive income.

Investing $2,000 in each stock should generate 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 produce huge earnings

At Friday’s closing price, Walmart is up just 1.2% — by far the lowest return of any stock on this list. However, Walmart is a victim of its own success.

When a stock’s price exceeds its dividend growth rate, the yield will fall. Up more than 29% year-to-date, Walmart is the best-performing component of the Dow Jones Industrial Average — better than Microsoft, Appleand other growth stocks.

Walmart is a dividend king with over 50 consecutive years of dividend increases. It raised its dividend by 9% in February, and there’s reason to believe that the pace of dividend growth will continue to accelerate.

Walmart’s guidance for fiscal 2025 is decent but not great, with consolidated net sales expected to grow at least 4%, adjusted adjusted operating income at least 6% and adjusted earnings per share (EPS) of at least $2.37 . If that’s what Walmart earned when the 2025 fiscal year ends on Jan. 31, today’s price would give it a price-to-earnings (P/E) ratio 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, improved its Walmart+ e-commerce delivery program and more. These expenses will not immediately translate into profit. However, we could start to see capex become a smaller percentage of sales starting next fiscal year, which should boost margins.

Short-term investors may scoff at Walmart’s payout ratio of just 33% and wonder why the company isn’t allocating more profits to dividends. While Walmart could afford to pay a much higher dividend, investors could benefit even more in the long run if they allocate capital effectively. In the last 12 months, Walmart spent $20.85 billion on investments — more than three times what it spent on dividends. Walmart is in growth mode, so buying the stock is more about where the business (and in turn, the dividend) is going than where it is today.

Walmart is not an exciting company, but this is an exciting time to be a Walmart investor, especially if it can continue to make progress with pickup and delivery on the margin.

The target is to find its place

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

In Target’s case, a small dividend hike was probably the best choice. This chart will give some clues as to why.

TGT Revenue (TTM) data by YCharts

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

Since then, sales growth has stagnated and margins have declined. 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. In the middle, that would be earnings growth of less than 2%.

Target has not been a consistent business in recent years. The volatile stock price reflects the ebbs and flows in investor sentiment. Still, going forward, Target stands out as a quality, value stock to buy now. The payout ratio is below 50%, indicating that Target can easily afford the dividend. The dividend yield is 3.3% — much higher than Walmart, for example. The target isn’t growing at the pace investors are used to, but the P/E ratio is just 15.2, which is very 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 keeps costs under control

Like Target, Clorox has been in recovery mode in recent years. Clorox saw a surge in demand at the start of the pandemic. Management was confident that hygiene habits would remain even after the pandemic. But that didn’t go exactly as planned. In fact, Clorox vastly overestimated demand, was hit by supply chain challenges, inflation, and then — to top it off — a cyber attack that hit the company hard in 2023. Needless to say, it was out of business as usual at Clorox.

As you can see in the chart, Clorox’s sales, general and administrative expenses grew faster than revenue. After rising in 2020, operating income has declined over the past five years due to sluggish growth and high expenses.

CLX Revenue (TTM) data by YCharts

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

Clorox does better, but not great. However, like Target, the stock price already reflects the company’s challenges — with Clorox currently down from where it was before the pandemic.

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

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