Kohl's Dividend Dilemma: A Yield Too Good to Be True?

Kohl's (KSS) is dangling a dividend yield of 6.15% as of May 2025—a figure that might tempt income investors lured by the promise of outsized payouts. But beneath the surface, the retailer's financial health is fraying. With -5% sales guidance for FY2025, a payout ratio flirting with 80%+ of projected earnings, and a stock price that has cratered to $8.13—down nearly 56% from its 2023 highs—the company is in a precarious balancing act. The question is no longer whether Kohl's can sustain its dividend but whether investors should let their capital ride the roller coaster.

The Payout Ratio: A Red Flag Waving in the Wind

Let's start with the math. Kohl's plans to pay an annual dividend of $0.50 per share in FY2025, split into four quarterly installments of $0.125. The company's diluted EPS guidance for the year is a meager $0.10 to $0.60 per share. At the high end of this range, the payout ratio balloons to 83%—a level that leaves little room for error. But if Kohl's hits the low end of its EPS forecast, the payout ratio soars to 500%, meaning the dividend would consume five times its earnings.

Even at the midpoint of the guidance—$0.35 EPS—the payout ratio would still hit 143%, a glaring red flag. This isn't a temporary hiccup. Kohl's has been burning through cash to prop up dividends while sales shrink. In Q1 FY2025, the company reported a net loss of $15 million, yet still paid out $0.125 per share. The result? A 203% payout ratio for the quarter alone.

Sales Slump and Structural Challenges

The dividend isn't just unsustainable; it's being subsidized by a business in decline. Kohl's FY2025 sales guidance calls for a 5-7% drop in net sales, with comparable sales down 4-6%. This isn't a one-off dip but part of a years-long erosion. The retailer's reliance on brick-and-mortar stores—many in malls struggling to attract shoppers—has left it vulnerable to 30% tariffs on Chinese imports, rising inflation, and e-commerce dominance.

Inventory has swelled by 2% year-over-year, suggesting overstocking and potential markdowns. Meanwhile, operating margins are projected to shrink to 2.2-2.6%, a fraction of the 10-15% margins that healthy retailers enjoy. Kohl's is running on fumes, and the dividend is the last thing keeping the engine alive.

Valuation: A Dividend Trap in Disguise

The stock's $8.13 price tag has pushed the dividend yield to 6.15%, but this is no value play—it's a yield trap. A sustainable yield requires stable earnings, predictable dividends, and a moat against competitors. Kohl's has none of these.

Compare this to Visa (V), which sports a 1.2% dividend yield but boasts a 28% payout ratio, 15-20% earnings growth, and a fortress balance sheet. Visa's dividend is a reward for investors, while Kohl's is a life support system for a dying business.

Why This Ends in a Dividend Cut—and Why It's Already Priced In

Investors aren't blind to the risks. The stock's 52-week low of $7.89 reflects market skepticism about Kohl's ability to sustain its dividend. A cut is inevitable unless sales rebound—a scenario the company itself deems unlikely.

The writing is on the wall: Kohl's is choosing dividends over debt reduction and reinvestment. With $400M-$425M in capital expenditures planned for FY2025, the company is doubling down on stores that no longer drive traffic. Meanwhile, the dividend consumes cash that could be used to pay down debt or modernize its e-commerce platform.

Conclusion: Sell Kohl's—Buy Visa's Safety Net

Kohl's dividend is a siren song luring investors into a sinking ship. The math is irrefutable: a payout ratio nearing 80% with earnings under pressure means the dividend is unsustainable. Investors would be better served by Visa, which offers 15%+ annualized returns with a dividend backed by $30B in cash and minimal payout risk.

Action: Sell Kohl's (KSS) now. The dividend cut is coming—and when it does, the stock will plummet further. For income investors, Visa (V) is the safer bet.

The road to recovery for Kohl's is long, and dividends are the last thing this retailer should prioritize. Don't let a 6% yield blind you to the 50% drop in store.