Dividend stocks are always popular for the passive income they provide. However, not all dividend stocks are created equal. Right now, I recommend Costco Wholesale (COST 1.01%), Starbucks (SBUX 0.47%), and Williams-Sonoma (WSM 0.17%) as three dividend payers to buy hand over fist. Here's why.
1. Costco: The juicy special dividends
Costco has soundly beaten the S&P 500 over its years on the market. Its membership model generates customer loyalty, and its low prices drive high sales volume. Even now, when sales growth has come to a trickle, its membership metrics tell a different story. In its fiscal third quarter, which ended May 7, its membership increased 7% year over year though sales only increased by 1.9%. Also, membership renewals were at record rates: 92.5% in the U.S. and Canada, and 90% globally.
The warehouse chain is experiencing the same pressures as most other retailers, but it's likely to bounce back.
It also still has a huge runway for growth by opening new stores. Right now, it has about 853 warehouses worldwide, and 587 in the U.S. It has been opening around new 25 locations annually, but it's looking to bump that rate up to 30 annually in a few years.
Costco has particularly grand ambitions in China, and opened its first store there earlier this year. That huge market alone could provide it with tremendous opportunities.
Since Costco's membership fees go straight to its bottom line, its coffers are usually well-stocked with cash, some of which it distributes to shareholders in the form of its regular quarterly dividends.
Those dividends on their own don't offer an impressive yield -- it's just 0.71% at the current share price. But there's something else that makes it very attractive, and that's the special dividend.
Costco has issued special dividends four times over the past 11 years, each of which was between $5 per share and $10 per share. Spread out over time, they make the chain's total yield much higher.
Management has said several times that it plans to issue more special dividends, and based on the average time between the previous ones, another one should be coming up soon.
There are so many things to like about Costco stock -- its dividend is just one of them.
2. Starbucks: The growing dividend
Starbucks has also beaten the market over many years, and it continues to demonstrate impressive growth rates. Sales increased 14% in its fiscal second quarter, which ended April 2, with comparable store sales (comps) up 11%. That means that in addition to sales from new stores, customers are buying more at Starbucks' established stores. Companies use comps as an indication of overall operational health.
Even its profits have been growing despite inflation, up 36% year over year in fiscal Q2 to $0.79 per share.
Starbucks went through challenges when its dining rooms were closed early in the pandemic, but it used those constraints as a springboard for improvement, and what has emerged looks like a stronger, more agile company with a new sense of direction.
It onboarded a new CEO this year, and the company is making improvements in its purpose and technology to meet the demands of customers in the digital age. That means more digital ordering options, faster service, and more efficient customization. So far, it looks like customers are responding.
Despite already having more than 36,000 stores, management still sees tremendous global growth opportunities. Even in the U.S., Starbucks is still opening more stores, and it also has massive ambitions for expanding in China.
Starbucks has raised its dividend every year since it started payouts in 2010, and it yields around 2.1% at the current share price -- well above the S&P 500's average yield of 1.6%.
Investors should expect continued dividend hikes and share price gains from Starbucks.
3. Williams-Sonoma: The high-yielding dividend
Williams-Sonoma is one of those stocks that don't get talked about enough. It has also beaten the market over many years, and has reliably delivered growth and a high-yielding dividend.
Though Williams-Sonoma demonstrated incredible resilience and growth throughout the early phases of the pandemic and into the current inflationary period, that's starting to taper off. In fact, net revenue fell 3.5% in 2023's first quarter. The company measures its operational health using a metric it calls comparable brand revenue, which dropped 6% in the quarter.
In general, Williams-Sonoma posts brisk sales growth, as it caters primarily to an upscale demographic that has more disposable income than the average American. But not all of its customers come from the upper income brackets, and plenty of Americans are feeling the pinch economically. And for those shoppers who are curbing their spending, non-essentials like luxury housewares are going to get cut from the budget.
This is also affecting the company's profitability, as it's having to discount more merchandise to sell it off at the same time that its freight and delivery costs increased. Operating margin fell from 17% in Q1 of last year to 11.4%, and earnings per share fell from $3.50 to $2.35.
But Williams-Sonoma is forecasting a better second half of the year, and reiterated guidance for sales in the range of down 3% to up 3%, as well as its long-term outlook of "mid-to-high single-digit annual net revenue growth with operating margin above 15%."
Despite its poor first-quarter performance, investors have been looking at the big picture. The stock is up 9% so far this year. It now trades at a cheap valuation of only 9 times forward 1-year earnings.
It also pays a dividend that yields 2.6%. Expect the stock to bounce back when the economy recovers. And in the meanwhile, it should keep delivering a reliable and high-yielding dividend over the long term.
