Is Costco still a great dividend stock?

When many people consider a holding in their portfolio to be a dividend-paying stock, it’s usually a stock that would offer a yield well above even the most generous bank accounts. The basic dividend of the distribution giant Wholesale Costco (COST -1.18%) would generally not qualify for this with a recent yield of just 0.9%.

But Costco approaches its shareholder payouts a little differently, as this relatively modest base dividend is supplemented by a special dividend in years when business conditions warrant. It’s happened four times in the last 10 years, and it’s made a huge difference to long-term returns.

So for investors looking for a holding that offers income and can anchor a portfolio, Costco is worth a closer look.

Image source: Getty Images.

Add over time

Costco has been a great investment over the past decade, even without considering dividend income. As can be seen in the table below, this return exceeded the total return of the S&P500 index by a significant margin. But the more accurate comparison that includes dividends for both shows that Costco’s total returns are more than double those of the widely followed index.

COST table

COST data by YCharts

Lumpy is fine too

Costco’s special dividend payments are company-based, so there’s no known timeline for receiving them. But four have been paid in the past 10 years. That makes Costco a lump-sum dividend payer, but as long-term results show, it’s worked well for investors so far.

COST Dividend Table

COST Dividend Data by YCharts

The details of the exceptional dividend payments are detailed in the table below. And on top of those payouts, shareholders saw the base quarterly dividend drop from $0.275 per share to $0.90 per share during this period.

Metric November 16, 2020 April 25, 2017 January 30, 2015 November 28, 2012
Special dividend per share $10 $7 $5 $7

Data source: Costco Wholesale.

The company behind the payments

Costco’s business model has always been about growing its membership base and expanding its operations. It relies on its recurring membership revenue to help maintain prices that consumers find attractive. Satisfied customers and a growing store base attract new members, and the business grows.

Revenue growth was helped by pandemic-related trends, but that only accelerated the pace of what was already increasing sales.

COST Revenue Table (TTM)

COST Revenue (TTM) data by YCharts

In its recently released third-quarter fiscal 2022 results, the company said it grew sales 16.3% year-over-year. Perhaps more importantly, even as many retailers struggle with supply chain disruptions and rising input costs, Costco was able to increase net earnings per share by more than 10% over the period. of the previous year.

During Costco’s quarterly investor conference call, Senior Vice President of Finance and Investor Relations Bob Nelson summed up, “While we continue to mitigate the impact of price increases as best we can can, we remain confident in our ability to meet higher costs while delivering great value for our members.”

So while many businesses are struggling in the current business environment, Costco has a plan to balance rising costs to keep its business in growth mode. This is good news for long-term investors who should continue to see a balance between a rising base dividend and occasional special payouts. This makes Costco a great stock for those looking for that extra income.

About Warren Dockery

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