Department Store Stocks That Pay You

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The fact of the matter is, department stores and I don't usually get along. But despite my predilection for dressing as though I were homeless and wearing my clothes until they literally fall apart, I have a lot of respect for stores that make a profit off of people's desire for a particular image. I also like when these kinds of stores have the potential to pay me.

Let's Start in the Middle

Kohl's (NYSE: KSS) is a pretty solid-sized company at a $10.59 billion market cap. But that doesn't have anything to do with its actual operation. The dividend rate is 2.8%, which is pretty good. I also respect that the company's payout ratio is only 28% of its free cash flow, which lends some credit to the sustainability of this dividend.

Of course, Kohl's is far from perfect. It isn't high-end enough to escape competing against Wal-Mart, which can hurt virtually any business. I'm also not confident about the fact that Kohl's is only pulling trailing 5.6% profit margins and that its quick ratio is only .10. All told, I'm not sure if Kohl's has sufficient cash after paying its expenses to take care of its financial obligations if anything goes wrong, and there are few more disheartening things than watching a decent dividend get suddenly slashed. I would suggest treading cautiously.

How's the Top Shelf Handling the Economy?

Macy's (NYSE: M) is a slightly different story. Macy's price point tends to be higher for its higher end goods, which has greater potential to drive revenues than the Kohl's crowd. The 22% payout ratio and 2% dividend yield are good, so I'm intrigued enough to investigate further.

Unfortunately, retail has been hit pretty hard and the upper-middle range is still suffering somewhat. With only 5% profit margins and a quick ratio of .20, I don't see any compelling evidence that Macy's won't drop their dividend if they have a bad quarter. Again, it's good to tread cautiously.

How's the Discount Level Doing?

TJX Companies (NYSE: TJX) occupies the niche at the other end. Being the biggest international home fashions and apparel off-price store in the US means that the recession hasn't hit the company quite as hard as it has hit others. Pulling 7.1% profit margins and working with a wider potential range of people who aren't ready to slide to Wal-Mart but can't quite handle Macy's prices offers a lot of flexibility. Since Q1 of 2012, TJX's sales have grown 10.7% while retail sales as a whole have slid. That seems pretty robust.

Unfortunately, nothing in this world is perfect. TJX's payout ratio is 18%, which isn't bad, but it only pays 1%. Considering the volatility and the potential for a total cut, particularly with a P/E ratio of 19.21 and a price/book of 9.5, I could sleep better and get a similar rate of return in my savings account. While TJX is pretty secure, it's also a bit pricey for a "discount" retailer.

Breaking it Down

As of this moment, I can't say that many great things about department store stocks that pay you. While they do today, they're not giving me a ton of confidence that a bad quarter or a missed earnings estimate won't drop their dividends. If it comes down to keeping either the dividend or the company alive, responsible management will choose the company. But my goal is still to live off of my dividends, and I don't think this is the way to do so.

pongun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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