Costco Wholesale Corporation (NASDAQ:COST) is a members-only warehouse club and one of the largest retailers in the world.
The bulk sales and business-focused offerings available at Costco’s nearly 800 stores have long helped small businesses and organizations.
When the 2020 coronavirus pandemic hit, Costco became one of the most important and valuable businesses for those seeking a way to shelter at home in comfort.
In fact, while Costco stock certainly gained value from the panic shopping, it’s just a continuation of the same pattern since its December 5, 1985 initial public offering (IPO) at $10 per share.
But is Costco a good dividend stock?
That’s the question we’re going to explore for those of you seeking to gain passive residual income from your portfolio. Costco is more than just the best place to buy a lifetime supply of salt or green beans. It’s also well known as a great company for several reasons – let’s break it down.
Is Costco Dividend a Value Trap?
Its business model stands at odds with the changes Amazon (NASDAQ:AMZN) forced into the rest of retail, as it largely focuses on in-store, brick-and-mortar experiences versus e-commerce.
The company entered 2020 with just under 100 million members spread across eight countries around the world. Renewal rates hover around 90%, which helps predict revenue, much like Amazon’s Prime service.
The fact is most people generally love Costco as a company, along with many of its Kirkland-branded, in-house products. Enthusiasm isn’t slowing, and it is well positioned for success heading into the 2020 holiday season, no matter what social distancing rules are.
The unfortunate side effect of Costco’s steady, consistent, and meteoric rise is that it has been gaining in value for much of its time in existence.
It leads to the exact opposite effect of FOMO (fear of missing out). Instead, Chicken Little is always warning that the sky is falling on a stock that never seems to stop growing. Stock prices reflect the company’s coronavirus revenues, and looking back to 1985, Costco outperformed the market, especially the retail sector.
While the COVID-19 panic shopping sprees fueled Costco revenues, it’s not slowing down heading into the holiday season, and the company took on enough debt to reorganize and prepare for the new way to do business.
Costco is also considered a value trap by some because it spent the past decade making special dividend payments that are unlikely to continue moving forward. However, its steadily increasing market capitalization, profits, and regular dividend payments have many warmed up to this opportunity.
Now that you understand the stock’s price, let’s check out the dividend payments.
Costco Dividend Schedule
Costco regularly and consistently pays a quarterly dividend. It also historically paid a special dividend throughout the years based on earnings. This special dividend was more than the regular dividend payout.
In December 2012, for example, the company paid out $7 per share for a special dividend, compared to the $0.275 earned that quarter. Special payouts also happened in May 2017 ($7) and February 2015 ($5), for $19 in total payouts over the past eight years.
There’s strong speculation Costco’s current debt load will put a halt on any special dividends moving forward from 2020. This means investors will need to depend on the regular dividend yield, so let’s talk about how much that is.
Costco Dividend Yield
Closing out 2020, Costco investors are enjoying a $2.80 annual dividend, with the most recent cash payout of $0.70. It has annual increases in its yield, which correlates with the rising revenues and market capitalization. In 2005, the dividend yield was $0.445, which was $0.795 by 2010, $1.555 by 2015, and $2.52 in 2019.
Of course, the actual value of Costco as a dividend stock is determined ultimately by its dividend yield and payout ratio. Based on the 2020 stock price over $300, its dividend yield is 0.81 percent. This is a respectable yield that should convince you to hold the stock for the long term.
Costco Dividend Payout Ratio
The company’s dividend payout ratio (total dividends divided by net income) is 40.61 percent. This means investors are strongly invested in the continued profitability of Costco as a company to feed COST as a stock. Employees also hold about 30 million shares through the company 401k plan, which helps the company remain sustainable.
If investors, employees, and customers are all happy with their Costco experience, there’s little reason to doubt the company can sustain this model for at least another decade. Now that you understand the stats behind how Costco is performing as a business and investment, let’s address its performance as a dividend-yielding stock.
Is Costco a Good Dividend Stock? The Bottom Line
Costco always ran counterculture to traditional retail and made the warehouse concept mainstream. This drew competitors like Walmart into the arena and continues to stand against wisdom.
While everyone else in retail reduced their brick-and-mortar footprint to focus on ecommerce, this model remains the heart of Costco’s business. It came in handy during the 2020 novel coronavirus pandemic, as consumers flocked to the warehouse giant in droves to stockpile supplies and prepare for stay-at-home orders.
Because its model is so successful, Costco stock has continuously grown in value since its 1985 IPO and has a solid 15-year history of paying increasing quarterly dividends. It also supplements this with special dividends whenever profitability allows, and almost half of all profits are returned to shareholders.
With enough Costco stock, it can pay for its own annual Costco membership just with dividends. This makes COST stock attractive for the investor seeking passive income opportunities.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.