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1 Top Dividend Stock to Buy Now

By Daniel Sparks - Apr 21, 2021 at 5:35AM

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Don't overlook this dividend stock because of its low dividend yield. There's more to the story.

Wholesale retailer Costco (COST 0.52%) announced a 13% increase to its dividend last week. The double-digit dividend increase was a good reminder why the stock has become a great investment for investors looking for income in their portfolio. The retailer has now increased its dividend 17 years in a row, and there's likely more growth to come in the years ahead.

But there's much more to this dividend stock than its 0.9% dividend yield and years of consistent growth.

Here's why dividend investors may want to take a closer look at Costco stock.

A roll of hundred dollar bills next to the word, dividends

Image source: Getty Images.

Accelerated growth

First of all, it's worth noting that Costco's recently announced dividend increase was a significant acceleration over the company's 8% dividend increase last year. The dividend's accelerated growth, however, isn't surprising given the company's strong underlying business momentum.

Costco's trailing-12-month revenue rose 13% and its trailing-12-month earnings per share jumped 16%. Further, Costco's sales for the five-week period ending April 4 rose 16%, with its same-store sales rising 11% when excluding the impacts of changes in gasoline prices and foreign exchange rates. 

While the company's strength is in brick-and-mortar sales, management isn't overlooking the opportunity in e-commerce. E-commerce sales in Costco's most recently reported quarter were up 76% year over year. And even as the economy reopens and COVID-19 vaccines ramp up and more people are willing to venture out to stores, Costco still saw 55% growth in e-commerce sales for the five-week period ended April 4.

Don't forget about Costco's special dividend

But here's what investors giving a surface-level look at Costo stock as a potential dividend stock often miss: in the past, the company has -- from time to time -- paid out massive special dividends on top of its regular dividend payments. Late last year, for instance, Costco paid out a $10 special cash dividend. This was 14 times larger than its quarterly payment at the time.

While Costco management never guarantees investors that it will pay out a special dividend, the massive payday for investors has been a somewhat regular occurrence for the company. Costco paid $7, $5, $7, and $10 special dividends in 2012, 2015, 2017, and 2020, respectively.

With so many special dividends paid since 2012 -- and given their size relative to Costco's regular dividend -- it's safe to say that Costco's sub-1% dividend yield doesn't tell the whole story for this company's dividend payout potential.

Even more, Costco investors should consider that the company's regular dividend accounts for less than 30% of the company's earnings. This means there's plenty of room for further growth in Costco's regular dividend -- especially since its earnings are trending sharply upward.

Costco's strong business momentum, long history of dividend growth and special dividends, and low payout ratio make this a great dividend stock for investors looking for income.

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Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$488.26 (0.52%) $2.50

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