Is Costco Wholesale Stock an Underrated Dividend Investment?

Shares of Costco Wholesale (NASDAQ: COST) have risen by more than 170% in the past five years, significantly outperforming the S&P 500 and its roughly 80% gains over that stretch. The retailer's operations have proven to be resilient, and its steady and calculated growth strategy has paid off.

One thing that may not always attract investors' attention, however, is the company's dividend. At just 0.5%, Costco's yield doesn't exactly stand out in a positive way. But with dividend increases over the years and occasional special dividend payments, could this be an underrated income stock to own?

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Why Costco's dividend is better than it appears to be

Costco's dividend yield would be much higher than it is if not for its red-hot stock price. When a stock rallies significantly in value, that brings down its yield, since it means investors are paying more to collect the same dividend payment. And that's even with Costco raising its dividend over the years.

At the start of 2020, the company was paying its shareholders a quarterly dividend of $0.65, which has since risen to $1.30 -- doubling in value. That averages out to a compounded annual growth rate of 12.2%.

During that time, the company has also paid a special dividend twice. In 2020, it paid $10 per share, and in 2023, it announced a payment of $15 per share. A special dividend is even more discretionary than a regular dividend payment and can come if a business has enjoyed a particularly strong year, but it is by no means predictable. If a company issues one, however, it is a good indication of its willingness and eagerness to reward its shareholders.

Costco's dividend is a big plus for long-term investors

I don't think Costco's dividend should be the main reason to invest in the business, but it also shouldn't be overlooked, as it may be underrated by many investors due to its low yield.

A better approach may be to simply view it as a great bonus for hanging on and investing in the company for the long haul. That's the mentality I'd take with Costco's stock today, because its valuation is incredibly high; you're paying more than 50 times earnings for a retailer that's growing in single digits.

That can be tough to stomach, unless of course, you're willing to hang on for years, potentially decades. In that case, it may still make for a good investment to hold on to. Not only can you benefit from Costco's growth, but also its dividend increases and special dividend payments along the way. For long-term investors, this can be a solid stock to simply put in your portfolio and forget about.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.