Costco Wholesale (COST -0.24%) is a solid business to invest in as the big-box retailer seemingly always finds ways to grow -- even amid a global pandemic or when inflation is high. The one feature of the stock that may disappoint investors is its dividend yield. At the current share price, it yields only 0.7%, so you would need to invest a whopping $143,000 to collect just $1,000 in dividend income over the course of a full year.
That payout may look underwhelming, but it really isn't. Here's why Costco's dividend is more impressive than it appears to be.
Blame Costco's low yield on the stock's popularity
Yield is a function of both the dividend the company pays and the current stock price. And over the last five years, Costco's share price has risen by 162%. As of the end of January 2018, the retail stock was trading at around $195.
If Costco was just a boring dividend stock without strong growth and the share price was flat over the past five years, its dividend yield would now be around 1.8% -- above the S&P 500's current average of 1.7%. But investors would likely be disappointed with the stock if all the returns they had to show for owning it came from the dividend.
The sheer success of Costco's business and the popularity of its stock are the key reasons why the dividend yield is as low as it is right now, as the share price has increased at a much faster rate than its dividend. And Costco has actually been generous when it comes to dividend increases.
An 18-year streak of annual dividend hikes
Since it started paying dividends in 2004, Costco has consistently raised its regular quarterly payments every year. From just $0.10 when it initiated the dividend, it's now paying $0.90. Those regular payouts have grown at a compound annual rate of 13%. At that rate, it would take roughly six years for the dividend to double again.
But what makes Costco an even sweeter deal for income investors is that management also occasionally issues special dividends. While all dividend payments are discretionary, consider special dividends to be even more discretionary and rare. Companies can issue them when they have a particularly strong year, such as in 2020 when pandemic-induced bulk buying led to a phenomenal year for Costco. For the fiscal year that ended Aug. 31, 2021, its sales rose 17% to $196 billion, and profits jumped by 25% to just over $5 billion. The fiscal year before that, its bottom line increased by less than 10%.
Management decided to share the wealth with shareholders, and distributed a special dividend of $10 per share in December 2020. Adding a $10 payout to the annual dividend today would boost Costco's yield for the year up to 2.5%. But because of the intermittent nature of special dividends, investors can't rely on them. However, the company previously issued special dividends in 2012, 2015, and 2017. This highlights how investors could potentially earn much more than the stated yield. The key is to buy and hold the stock, and remain patient.
Costco's stock is expensive, but it's a good long-term buy
Trading at close to 40 times earnings, Costco isn't a cheap stock to buy, and I wouldn't be surprised if it underperformed the market this year. But if you're a dividend investor who is looking for a long-term investment, Costco could be an excellent option. In the long run, its business is likely to continue growing. Plus, its consistent track record of payout boosts means that it's probable that your dividend payments will increase over the years, and you may even benefit from special dividends along the way.
