The dividend isn't the first thing most investors think about when they're looking at Costco (NASDAQ:COST) stock. Compared to peers like Walmart (NYSE:WMT), the warehouse retailer returns a small portion of its earnings to shareholders and promises a weaker yield.

Yet Costco's dividend is more generous than it might appear, especially since that payout is backed up by an unusually steady flow of earnings. So, let's look at the case for considering Costco a great dividend stock.

A man shops in bulk.

Image source: Getty Images.

A closer look at the dividend

Costco recently boosted its quarterly payout by 8% to $0.70 per share. The $2.80-per-share annual payout is about one-third of its past year of earnings and translates into a 0.9% yield based on the current stock price.

Each of those metrics is weak when compared to traditionally popular dividend stocks in the same industry. Walmart pays over half of its earnings out in dividends, for example, and the yield is nearly a full percentage point higher. Home Depot pays out 55% of earnings each year to its shareholders and investors can receive $6 per share, or a 2.5% yield, by purchasing that stock today.

But don't forget about Costco's special dividends, which have been significant in recent years. In fact, the company paid over $8 billion in those lump-sum windfalls from 2012 through 2017. Including those payments pushes its payout ratio to a much more aggressive 70% of earnings in that period. However, investors can't count on special dividends because they don't occur with any regularity.

About the business

It's a bit unfair to ding Costco for its lower dividend yield since that factor is influenced by its unusually strong stock price trends. Its shares have more than doubled in the past five years compared to a 40% increase in the broader market and a 60% gain for Walmart. Target (NYSE:TGT) is up 48% in that period.

That means an investor's total return, or stock price appreciation including the reinvesting of dividends, has been far higher for Costco than for Dividend Aristocrats like Target and Walmart.

WMT Total Return Price Chart

WMT Total Return Price data by YCharts.

Costco also gets extra points for having an unusually steady sales footprint and robust earnings growth. Most of its profits come from membership fees, after all, rather than product markups. That setup protects it from the significant swings in revenue and earnings that impact most of the industry.

As a result, earnings rise with almost predictable regularity. Net income jumped to $3.7 billion in 2019 from $3.1 billion. Walmart's comparable figure rose last year as well but has declined in three of the last five fiscal years.

A great stock with a good dividend

Costco routinely outperforms its chief rival -- and most other retailing peers -- in key trends like customer traffic, market share, and earnings stability. The fact that over 90% of its members renew their subscriptions each year illustrates how much value it is delivering to millions of consumers. And those successes have translated into market-beating returns for investors over many years.

But investors can find more generous, faster-growing dividends in other parts of the consumer staples sector, like Procter & Gamble. If you're looking for a great business that pays a decent dividend, on the other hand, then Costco deserves a spot on your watchlist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.