3 Retail Stocks to Buy Despite the Weak Consumer Spending Numbers

NEW YORK (TheStreet) -- Retail stocks have gotten pummeled this earnings season. As evidenced by April's weak retail sales data, consumers just aren't spending as much money as the market had hoped they would. That slow spending has sent the SPDR S&P Retail ETF (XRT) lower over the past month. But that doesn't mean investors can't make money in the sector -- if they cherry-pick from the retailers poised to buck the downward trend.

Here are three dividend-paying retail companies to keep on your radar: Home Depot (HD), DSW (DSW) and Best Buy (BBY) . Aside from paying the above-average yields income investors love, each of these stocks offers the growth potential craved by aggressive investors. And they're relatively cheap, too, which makes them good fits for value investors.

Let's run down the list, starting with Atlanta-based Home Depot.

The world's largest home improvement retailer, it pays a 59 cent quarterly dividend, yielding 2.10% annually. This compares favorably to the average dividend payer in the S&P 500 (SPX) which has an annual yield of 2.00%.

Home Depot stock is up better than 5% on the year, besting the not only the broader averages, but also the 1.5% gain made by rival Lowe's  (LOW). Still, despite this relative outperformance, its shares are reasonably priced at just 22 times earnings, against a P/E of 21 for the S&P 500. Despite April's generally weak retail sales data, consumers continue to spend on home improvement projects, as evidenced by to Home Depot's earnings results: It delivered a 6.1% jump in revenue and an almost 5% increase in volumes.

With Home Depot seemingly gaining market share against Lowe's, which missed both Wall Street's earnings and revenue targets, investors who buy in today at around $112 can own shares of a market leader that is trading at just 18 times next year's earnings estimates of $6.02 per share. Based on projected 2016 earnings of $5.26 -- which would be more than 14% earnings growth -- Home Depot is expecting to bring in greater profits, which it could use to buy back more of its stock, while also increasing its already solid dividend.

Next, let's talk about footwear and accessories purveyor DSW. The Ohio-based specialty retailer pays a solid annual yield of 2.30%. Unlike Home Depot, though, DSW stock has lagged so far in 2015, losing more than 4%. This despite the fact that it doesn't seem fazed by weak consumer spending, and opened 37 new stores last quarter.

In fact, DSW has strung together four straight quarters where it has topped average analyst estimates for both revenue and profits. Its profit margins have begun to expand as revenue rebounds to low double-digit percentage increases, and it has shown no meaningful signs that it's slowing down. That its shares are down presents a strong buying opportunity for investors, especially with DSW stock trading at a P/E of 21 -- in line with the average S&P 500 stock.

Further, the average S&P stock doesn't have the earnings track record of DSW, which is projected to grow 2015 and 2016 earnings at 12% annually. On a forward-looking basis, DSW stock is trading at just 16 times fiscal 2016 earnings estimates of $2.12 per share, implying growth acceleration in the years ahead since its five-year projected annual growth rate stands at 15%. In short, DSW stock is now on the discount rack. And so is its dividend.

For all of the same reasons as DSW, it's tough to ignore how cheap Best Buy shares are today. The company pays a 23 cent quarterly dividend that yields 2.70% annually. Granted, with brick-and-mortar stores continuing to lose ground to e-commerce, this electronics retailer is not the powerhouse it once was. But Best Buy's business is not as bad as its P/E ratio of 9 would indicate.

That ratio means that Minnesota-based Best Buy, which has beaten earnings for 10 consecutive quarters, is valued at less than half the earnings multiple of the average company in the S&P 500. That simply doesn't make sense. From my vantage point, Best Buy, which continues to streamline its business, cutting costs and revamping stores, remains a solid buying opportunity for investors looking to outsmart the market.

Moreover, because Best Buy is now shipping products directly to consumers from all its stores, it will be able to offset the near-term weakness it experiences in in-store revenue. Coupled with better merchandising and margin expansion from lower operational costs, Best Buy's profits are poised to grow in the months and quarters ahead. And more profits frequently means more stock buybacks and higher dividends.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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