Costco: A Profitable Path for Dividend Investors

Costco has achieved remarkable shareholder returns by leveraging its effective business model and offering both regular and special dividends, making it a compelling long-term investment for dividend-seeking investors.
SummaryCostco has delivered exceptional returns for its shareholders, significantly outperforming the S&P 500 over the past year and five years. The company’s attractive business model, which offers substantial savings to its members, combined with an excellent customer experience, has won investor favor. Beyond its regular dividends, Costco occasionally issues special dividends, capitalizing on its strong net cash position. With a low payout ratio and robust revenue growth, Costco’s regular dividends have significant growth potential. While the Motley Fool’s Stock Advisor team recently identified top stocks to buy that didn’t include Costco, the retailer remains a promising long-term investment for those seeking growing dividend income.

The Remarkable Success of Costco Shareholders

Costco has given its shareholders a spectacular financial journey. Over the past year, the shares have surged by 60%, and looking back five years, they’ve skyrocketed by 208%. This impressive growth has outpaced the S&P 500’s returns during these periods. Wall Street’s enthusiasm for this membership-based wholesale retailer is clear. But what aspects of Costco make it so appealing to investors?

A Business Model That Shines

Investors are drawn to Costco’s business model, which leverages its scale to offer substantial savings on high-quality products to its members. This strategy, coupled with an exceptional customer experience, fosters loyalty among existing members and attracts new ones eager to benefit from the great deals. Beyond these fundamentals, Costco’s business includes smaller, yet highly appealing elements, such as the $1.50 soda and hot dog combo and a generous return policy.

Unveiling Costco’s Unique Dividend Strategy

A lesser-known facet of Costco’s allure is its distinctive approach to dividends. While the company’s dividend yield may appear modest at 0.5%, there is more beneath the surface. In addition to its regular quarterly dividend, currently at $1.16 (or $4.64 annually), Costco occasionally rewards shareholders with a special dividend. These special dividends are not recurring but are distributed at somewhat unpredictable times. For instance, the last special dividend of $15 was paid in one lump sum on January 12 of this year.

The “Special Sauce” in Costco’s Dividend

Costco’s special dividend is intriguing due to its recurring nature over the years, suggesting the potential for more in the future. Besides the $15 special dividend this year, Costco has issued special dividends of $7, $5, $7, and $10 in 2012, 2015, 2017, and 2020, respectively. These special dividends are often distributed when Costco’s net cash position (the total of cash, cash equivalents, and marketable securities minus long-term debt) becomes substantial. At the time of its last special dividend announcement, Costco’s net cash was an impressive $12 billion, a stark contrast to many retailers that often maintain a net debt position.

As Costco’s net cash position stabilizes or grows, the company’s board of directors may once again consider a special dividend. While the timing and amount of the next special dividend remain uncertain, investors can be reasonably confident that another is likely in the future.

Promising Dividend Growth Potential

Regarding Costco’s regular quarterly dividend, investors can anticipate considerable growth. This is largely attributed to the company’s payout ratio (excluding the special dividend earlier this year), which stands at just 26%. Essentially, Costco distributes only about one-fourth of its earnings as dividends, leaving ample room for increases.

Costco’s robust revenue and earnings growth further bolster the potential for dividend expansion. In its most recent quarter, the company reported a 9.1% year-over-year increase in sales. Additionally, a recent hike in the annual membership fee is expected to contribute to sustaining this growth momentum in upcoming quarters.

With the backdrop of potential continued dividend growth and the prospect of occasional special dividends, Costco emerges as a solid long-term investment opportunity for those seeking a growing stream of dividend income.

Should You Invest $1,000 in Costco Wholesale Today?

Before making an investment in Costco Wholesale, consider this:

The Motley Fool’s Stock Advisor analyst team recently identified what they believe are the 10 best stocks for investors to buy right now. Surprisingly, Costco Wholesale was not among them. The 10 stocks that did make the list are expected to yield substantial returns in the coming years.

Reflect on the case of Nvidia, which was recommended on April 15, 2005. If you had invested $1,000 at that recommendation, you would now have $710,860!*

Stock Advisor offers investors a straightforward strategy for success, complete with guidance on portfolio building, regular analyst updates, and two new stock picks each month. Since 2002, the Stock Advisor service has achieved returns more than four times greater than the S&P 500.*

Discover the 10 stocks ›

*Stock Advisor returns as of September 17, 2024.

Henry Lawson
Henry Lawson

Henry Lawson: The Sage of Screen Stories

At 50, Henry Lawson stands as a seasoned pillar in the realm of TV entertainment journalism, offering a wealth of experience and a discerning eye cultivated over decades of reporting. With his distinguished brown hair, now gently touched by the wisdom of silver, Henry has become a trusted name for insightful television news and analysis.

Born and raised in the culturally rich city of New Orleans, Louisiana, Henry's early years were steeped in the vibrant narratives of southern storytelling—a heritage that sparked his lifelong love for the art of narrative. His fascination with television began with classic shows of the '70s and '80s, which he watched with his family, fostering a deep appreciation for the evolution of storytelling on the small screen.

Henry pursued his passion academically at New York University, where he majored in Media Studies. After graduating, he embarked on a storied career that saw him writing for some of the most prestigious entertainment publications in the industry. His articles are known for their depth, blending historical context with current trends to provide a comprehensive view of the ever-evolving television landscape.

Having witnessed the seismic shifts from network dominance to the streaming revolution, Henry has become an authority on the subject, often called upon for his commentary on television panels and podcasts. His work not only covers the latest news but also delves into the cultural impact of television, exploring how it reflects and shapes society.

Outside of his professional endeavors, Henry is a devoted family man. He shares his life with his wife, Clara, a talented painter, and their two children, both of whom have inherited their parents' artistic inclinations. Family movie nights remain a cherished tradition, where classic films and new series alike are enjoyed and discussed in detail.

An avid jazz enthusiast, Henry spends his free time attending local jazz festivals and playing the saxophone, a nod to his New Orleans roots. He also enjoys gardening, finding peace and inspiration in cultivating his backyard oasis, where he often retreats to brainstorm his next article.

Henry Lawson's career is a testament to his enduring passion for television and storytelling. As he continues to chronicle the ever-changing world of TV entertainment, his readers rely on his seasoned perspective to navigate the complex tapestry of stories that captivate audiences around the globe.

Articles: 28

Related Posts