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4 Reasons to Like Costco's Dividend

By Daniel Sparks - Aug 21, 2018 at 7:31PM

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With a dividend yield below 1%, why would investors look to Costco for income?

Shares of warehouse shopping giant Costco (COST 1.24%) have been on a tear recently, rising 46% over the past 12 months. Unfortunately for investors interested in buying shares of the stock today, this means the company's valuation is steeper.

This is particularly evident by looking at the change in Costco's dividend yield over the past 12 months. Investors who buy Costco stock today get a dividend yield of 0.9%, down from about 1.2% a year ago. On the surface, a dividend yield this low may tempt income investors to overlook Costco. But a closer look reveals Costco is a compelling dividend stock despite its dividend yield below 1%.

COST Chart

COST data by YCharts.

Here are four reasons dividend investors should like Costco.

1. Costco pays special dividends

First and foremost, it's critical for dividend investors to realize that Costco's dividend yield significantly understates the company's attractiveness as a dividend stock. A dividend yield, which is calculated by dividing a company's quarterly dividends over a 12-month period by its stock price, doesn't take into consideration the special dividends Costco pays.

If Costco's special dividends only happened one or two times in the past 15 years, investors wouldn't need to give much weight to this trend in their analysis of the stock. But since December 2012, Costco has paid three major special dividends: $7 in 2012, $5 in 2015, and $7 in 2017. These special dividends tower over Costco's current quarterly dividend of $0.57. 

With three monstrous special dividends paid since December 2012 -- including one just last year -- investors should consider these meaty payouts when thinking about Costco's capital allocation strategy.

2. Costco has a low payout ratio

A company's payout ratio is a key metric used to evaluate how sustainable its dividend is. Defined as a business' annual dividends paid as a percentage of its earnings, the ratio helps investors get a sense of how much breathing room there is for a dividend. With a payout ratio of just 30%, Costco's dividend has plenty of breathing room. 

3. Earnings are growing nicely

While Costco's low payout ratio suggests the company could increase its dividend without growing its earnings, it doesn't look like the wholesale grocer will have to rely on boosting its payout ratio to grow its dividend in the coming years. Thanks to strong revenue growth and impressive economies of scale, Costco has been able to consistently grow its bottom line. Costco's trailing-12-month earnings per share climbed 9% year over year. 

A grocery cart in the aisle of a wholesale store

Image source: Getty Images.

4. Costco boasts double-digit dividend growth

Last but not least, Costco's historical dividend increases highlight management's commitment to increasing its dividend at meaningful rates on an annual basis. Over the past five years, Costco's dividend has increased at an average rate of 13.1% each year. Costco's most recent dividend increase, announced this spring, represented 14% growth.

With a track record of large special dividends and strong dividend growth, a low payout ratio, and meaningful earnings growth, Costco remains a compelling dividend stock -- even with a dividend yield under 1%.

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Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$470.76 (1.24%) $5.77

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