2 Dividend Stocks to Buy, 1 to Avoid

NEW YORK ( TheStreet) -- It makes sense for most long-term investors to put at least some of their loot into speculative positions. I invest anywhere from 10% to 20% of my portfolio in ultraspeculative stocks such as Pandora ( P) and Wendy's ( WEN) and growth plays that don't pay dividends, such as Madison Square Garden ( MSG).

The core of my portfolio, however, sits firmly in growth companies paying generally stable and increasing dividends.

In this article, I discuss two dividend stocks to consider buying and one to avoid.

Target ( TGT) and Wal-Mart Stores ( WMT)

Make no mistake about it: I am bearish on roughly 95% of brick-and-mortar retailers. Unless it's an Apple ( AAPL) store or something sharp, snazzy and exclusive like Lululemon ( LULU), I want no part of it.

Exceptions, however, do exist.

Although I do not own either yet, I have put Target and Wal-Mart on my radar.

The good news at Wal-Mart? Growth appears to have returned. I want to see how this past quarter worked out. (The company reports May 17.) But it seems like a reversal is underway, driven by Sam's Club revenue. Sales are up year over year across the board.

A need will always exist for Wal-mart and Sam's Club, particularly in rural and suburban areas and among older people who are not prepared to allow Amazon.com ( AMZN) to take over all aspects of their lives. If you do not know what a tablet is -- beyond your blood pressure medication -- chances are you will not order toilet paper on a Kindle Fire anytime soon.

At Target, meantime, growth did not need to return; it's been steady for years. And, if you have a long-term time horizon, now might be a good time to start accumulating the stock to position for future, stepped-up growth.

Target continues to expand the urban-centric CityTarget concept in dense portions of key metropolitan cores such as Los Angeles, San Francisco and, most recently, Portland. Plus it's on the brink of pulling in significant revenue from Canada with 60 stores set to open across the country in early 2013.

Both Target and Wal-Mart pay stable and steadily increasing dividends. WMT shareholders have seen their dividend increase from a nickel per share in 1974 to $1.59 per share in the coming 2013 fiscal year. TGT pays out $1.20 annually and has increased its dividend in most years since it began paying dividends.

Because I expect considerable upside in Target's urban and Canadian growth story, I intend to buy that stock later this month. The company reports on May 16.

Frontier Communications ( FTR)

Whatever you do, do not chase yield. You're so much better off in a strong company with a modest 2% to 3% yield like Target or Wal-Mart than you are in a yield trap such as Frontier Communications.

I feel for what I am sure are a whole host of retirees who got taken by what was once a double-digit dividend return. Of course, no dividend can make up for a 51% drop in the price of the underlying stock in the last year.

That chart, courtesy of Yahoo! Finance, has pain written all over it. Consider the trap an income investor could have fallen into. Last year, when FTR traded for almost $9, the company paid a quarterly dividend of $0.1875 per share. That's 75 cents per share annually.

A retiree sees that payout on a $9 stock and loads up with 10,000 shares. That's an investment of $90,000. Today, that stake in FTR comes out to about $40,000. The retiree is down $50,000.

The nice thing about a dividend is that it acts as a hedge. For instance, If Target stumbles in the near term, chances are the dividend will offset some, if not all, of the stock price decline. That's not the case when a stock collapses, however.

If a retiree earned $7,500 in dividend income but the value of his or her stock position plummeted, the income would offset just a small portion of a catastrophic loss.

At the time of publication, Pendola was long LULU, MSG, P, WEN.