When many people consider a holding in their portfolio as a dividend stock, it is typically one that would offer a yield that pays well above the most generous bank accounts. The base dividend from retail giant Costco Wholesale (COST +1.28%) typically wouldn't qualify for that with a recent yield of only 0.9%.
But Costco approaches its payouts to shareholders a little differently, because that relatively modest base dividend is supplemented by a special dividend in years when the business conditions warrant. That's occurred four times in the past 10 years, and it's made a huge difference in 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.
Adding up over time
Costco has been a great investment over the past decade even without considering dividend income. As can be seen in the chart below, that return outpaced the total return of the S&P 500 index by a significant margin. But the more accurate comparison that includes dividends for both shows total returns from Costco more than double those of the widely followed index.
Lumpy is OK, too
Costco's special dividend payments are based on the business, so there is no known schedule for receiving them. But four have been paid over the last 10 years. That makes Costco a lumpy dividend payer, but as the long-term results show, it has worked out well for investors so far.
COST Dividend data by YCharts
The details of the special dividend payments are broken out in the table below. And in addition to those payouts, shareholders have seen the base quarterly dividend increase from $0.275 per share to $0.90 per share in that time period.
| Metric | Nov. 16, 2020 | April 25, 2017 | Jan. 30 2015 | Nov. 28 2012 |
|---|---|---|---|---|
| Special dividend per share | $10 | $7 | $5 | $7 |
Data source: Costco Wholesale.
The business behind the payouts
Costco's business model has always been to grow its membership base and expand its operations. It leans on its recurring membership revenue to help maintain pricing that consumers find attractive. Happy customers and a growing store base attract newer members, and the business grows.
Revenue growth was aided by pandemic-related trends, but that only increased the pace of what was already growing sales.
COST Revenue (TTM) data by YCharts
In its recently reported fiscal 2022 third-quarter results, the company said it grew sales another 16.3% year over year. Perhaps more importantly, even as many retailers are battling supply-chain disruptions and rising input costs, Costco was able to increase net income per share by more than 10% vs. the prior-year period.
On Costco's quarterly conference call for investors, Senior Vice President of Finance and Investor Relations Bob Nelson summarized, "While we continue to mitigate the impact of price increases as best as we can, we remain comfortable in our ability to pass through higher costs while providing great value to our members."
So while many businesses are scrambling in the current business environment, Costco has a plan to balance rising costs to keep its business in growth mode. That's good news for long-term investors who should continue to see a balance of a rising base dividend along with the occasional special payout. This makes Costco a great stock for those seeking that additional income.
