Costco's (COST 1.14%) dividend is in the limelight this week, following an announcement from the company that it's increasing its quarterly payout. But is the stock's dividend actually attractive?

On the surface, Costco's dividend may seem too small to be compelling. With a dividend yield of less than 1%, there are plenty of other dividend stocks paying investors more cash for every dollar invested.

Indeed, the average dividend yield of stocks in the S&P 500 is about 1.7% at the time of this writing -- well ahead of Costco's. But there's more to the story when it comes to the membership-based warehouse retailer's dividend. Indeed, a closer look at the company's dividend shows that it's quite attractive.

Here's why investors should love Costco's dividend.

Strong growth

Costco reminded investors this week that its dividend is far from stale. The retailer announced a 13% increase to its dividend. Going forward, its quarterly dividend will amount to $1.02, translating to annual payments of $4.08. 

This adds to a long history of dividend increases for the company, adding to the evidence that Costco's enduring business model easily supports strong dividend growth over many years. Costco now boasts 19 consecutive years of dividend increases. 

A low payout ratio

Costco's dividend-growth potential helps offset the downsides of a low dividend yield. Today, Costco's dividend yield is just 0.8%.

While the company's history of dividend growth makes a strong case for more dividend growth in the coming years, investors can't have a high degree of confidence in continued growth until they take a look at a dividend stock's payout ratio, or the percentage of earnings that are paid out in dividends. If a company's payout ratio is 80% or higher, future growth in the dividend is at risk. A payout ratio should ideally be low enough that a company can continue increasing the dividend, even in years when earnings pull back.

Costco's payout ratio is exceptionally low, at about 26%. This leaves plenty of room for dividend growth in the years to come.

A healthy balance sheet

Also helping Costco look attractive as a dividend stock is the company's pristine balance sheet. The company currently boasts nearly $14 billion in cash, cash equivalents, and short-term investments.

Its long-term debt is only $6.5 billion, so Costco has a net cash position on its balance sheet, contrary to some of its competitors. Kroger and Sam's Club parent Walmart both run their businesses with significantly more debt than cash.

Occasional special dividends

If we were to stop here, we'd be leaving out one of the best things about Costco's cash payments to shareholders. From time to time, Costco pays out a special dividend to shareholders, on top of its quarterly payout. Its last special dividend, which was paid out in December of 2020, was $10, or 14 times the size of the quarterly dividend it was paying shareholders at the time.

While Costco hasn't promised shareholders a particular cadence for its occasional special dividend, it has historically been paid out about every two to three years. So it's fair to say that another special dividend could be up for consideration by Costco's board of directors as a possibility for 2023.

Overall, Costco's attractiveness as a dividend stock also highlights the company's overall financial strength. This combination of a low payout ratio, a cash level far in excess of debt, double-digit dividend growth, and occasional special dividends is both rare and impressive.