Discount retail giants Wal-Mart Stores (WMT) and Target (TGT) are both on the list of Dividend Aristocrats.

The Dividend Aristocrats are a group of 51 companies in the S&P 500 with 25+ years of consecutive dividend increases.

Wal-Mart and Target have raised their dividends for 44 and 45 years in a row, respectively.

With such long histories of steady increases, they have proven the ability to navigate the ups and downs of the retail industry.

This is an especially challenging period for both Wal-Mart and Target. Their core brick-and-mortar business models are under fire, from e-commerce sites like Amazon.com (AMZN).

Wal-Mart and Target are working hard to catch up in e-commerce, while continuing to reward shareholders with steady dividend raises.

Even though it might sound crazy, Wal-Mart’s quicker turnaround actually makes Target the better investment right now.

Business Overview

Winner: Wal-Mart

Wal-Mart has an edge over Target, because it is more diversified. Wal-Mart operates more than 11,000 stores, both in the U.S. and in the international markets.

Target operates exclusively in the U.S., after closing its stores in Canada.

In addition, Wal-Mart owns a warehouse club, under the Sam’s Club banner.

Wal-Mart is organized into three operating segments:

• Wal-Mart U.S. (64% of sales)
• Wal-Mart International (24% of sales)
• Sam’s Club (12% of sales)

Wal-Mart’s international business provides it with an advantage over Target, because it opens up new avenues for growth.

(Click on image to enlarge)

Source: 4Q Presentation, page 9

Wal-Mart saw strong growth in Canada, Mexico, and Brazil in the fourth quarter.

Excluding the impact of foreign exchange, Wal-Mart’s international segment grew net sales and operating profit rose 3.0% and 3.8%, respectively, last fiscal year.

10 of Wal-Mart’s 11 international markets posted positive comparable sales last year, seven of which grew comparable sales by more than 4%.

Target’s concentration in the U.S. has provided it with a nationwide footprint, consisting of 1,800 stores.

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Source: 4Q Earnings Presentation, page 74

The downside is that Target’s growth could be limited, since the U.S. is virtually a saturated market for retailers.

And, comparable sales at Sam’s Club rose 2.7% in the fourth quarter of fiscal 2017, well above Wal-Mart’s company-wide growth rate of 1.9% in the U.S.

Growth Prospects

Winner: Wal-Mart

Wal-Mart has better growth prospects, because it is further along in its turnaround than Target.

The two biggest growth catalysts for Wal-Mart and Target are e-commerce, and small stores. Wal-Mart has taken a lead in both areas.

Wal-Mart turned to M&A to expedite its e-commerce growth. It acquired e-commerce platform Jet.com for $3.3 billion.

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Source: 2016 Investor Meeting Presentation, page 4

Adding Jet.com allowed Wal-Mart to instantly take a big leap forward in e-commerce. In the first 13 months after the acquisition, Wal-Mart added 5 million new customers, thanks to Jet.com.

Wal-Mart also owns a 10% interest in Chinese e-commerce giant JD.com.

Overall, Wal-Mart’s e-commerce sales jumped 29% in the fourth quarter. Worldwide e-commerce sales increased 22% for the year.

At the same time, Target’s e-commerce platform is performing well—digital channel sales doubled in the past three years.

But Target’s digital platform is still fairly small, at $3.4 billion in 2016 sales. This represented less than 5% of Target’s total sales.

The next growth catalyst for big-box retailers in the U.S. is smaller stores. Stores with smaller square footage allow Wal-Mart and Target to expand in big cities.

Densely-populated urban areas typically cannot offer the square footage necessary to build a traditional store.

Wal-Mart does this through its Neighborhood Markets banner, which is very successful. Neighborhood Markets comparable sales increased 5.3% in the fourth quarter.

Target has developed small stores under the CityTarget and TargetExpress banners. The problem is, there are just 32 of these stores in operation.

(Click on image to enlarge)

Source: 4Q Earnings Presentation, page 75

By 2019, Target expects to more than triple its small-store count. But it will still operate just 100 stores by then.

For comparison, Wal-Mart operated 699 Neighborhood Markets stores at the end of 2016.

Valuation

Winner: Target

Target recently announced a significant cut in its financial guidance for the upcoming year.

For 2017, Target expects a low-single digit decline in comparable sales, which measures performance at stores that have been open at least one year.

Adjusted earnings-per-share are expected to decline 16%-24% in fiscal 2017.

The reason for the sharp reduction is that the company will be more competitive on price, and invest more aggressively in new growth channels like e-commerce and small stores.

This was a huge reduction, and the stock has been hammered as a result. Target shares have fallen from $81 to $56 in the past one year.

Such a huge drop is concerning, but it actually makes Target the more attractive buying opportunity. Target stock now trades for just 11 times 2016 adjusted earnings-per-share.

It may take time for Target to return to the same level of profitability, but its long-term earnings potential remains intact.

Meanwhile, Wal-Mart is a less attractive stock to buy right now, because it has already gotten credit for its turnaround efforts.

Wal-Mart’s adjusted earnings-per-share declined 5.9% in the most recent fiscal year, but the declines are moderating, and the company has returned to sales growth.

After bottoming at $56 in November 2016, Wal-Mart stock has rallied back to $70. Wal-Mart stock now trades for a trailing price-to-earnings ratio of 16.

The progress Wal-Mart made over the past two years, is largely priced into the stock valuation.

Dividend Yield

Winner: Target

Both Wal-Mart and Target have excellent dividend track records.

Wal-Mart made its first dividend payment to shareholders in 1974. Back then, its quarterly dividend was just a nickel per share.

Today, Wal-Mart’s quarterly dividend stands at $0.51 per share. Its dividend has risen 10-fold since making its initial dividend payment.

Meanwhile, Target has made 198 consecutive quarterly dividend payments, since its initial public offering in 1967.

But, since Target’s share price has gotten hit hard since earnings, its dividend yield has elevated to 4.3%. This is an extremely high yield, and represents a 10-year high for Target’s dividend yield.

Wal-Mart’s dividend yield is much lower, at 2.9%.

Target stock provides investors with approximately 48% more income, based on their current dividend yields.

Final Thoughts

With a stronger financial performance and more compelling growth opportunities in the international markets, Wal-Mart seems like the obvious winner in this matchup.

But Target’s recent share price crash presents a buying opportunity that is too good to ignore.

To be sure, Wal-Mart is a high-quality dividend stock. For example, it is a far better choice than Amazon at current prices for conservative investors.

But Wal-Mart isn’t the best retail stock to buy right now.

In the discount retail space, Target is the better dividend stock of the two, thanks to its significantly higher dividend yield and much lower valuation.Target outranks Wal-Mart using The 8 Rules of Dividend Investing thanks in large part to its lower price-to-earnings ratio and higher yield.