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Costco (NASDAQ: COST) operates nearly 900 club stores around the world. Realty Income (NYSE: O) leases out more than 15,600 single-tenant properties, largely to retailers, across North America and Europe. They represent two very different ways to invest in the retail sector, but which one is the best stock to buy now? Here's how you can decide.
What does Costco do?
Costco operates club stores, which means that its customers pay an annual membership fee that gives them the privilege of shopping in a Costco store. This is a very different model from a typical retailer, with Costco's membership fees making up just over 50% of its gross profit. Membership fees are an annuity-like income stream that allows the company to sell products with slimmer margins than its competitors.
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No wonder the membership renewal rate is regularly above 90%. And while earnings will wax and wane over time, offering good prices tends to make Costco resilient to economic downturns. Notably, the company has increased its dividend annually for over two decades. The average annualized growth rate over the past 10 years was a hefty 12%.
Costco looks like an attractive growth stock with a fast-growing dividend. The only problem is that the dividend yield is a miserly 0.5%. That's even lower than the 1.3% that you'd collect from an S&P 500 index (SNPINDEX: ^GSPC) fund. Dividend growth investors might appreciate the speed of the dividend's ascent, but the yield is so low that it would still be pretty easy to justify passing Costco over on the income front.
What does Realty Income do?
Realty Income is a net lease real estate investment trust (REIT). It generates around 75% of its rents from single-tenant retail properties. It is the largest net lease REIT, with a market cap that is more than three times larger than its next closest competitor's. There's nothing overly special about Realty Income's approach, other than the fact that it has been executing it well for a very long time.
Due to its long success, the REIT's dividend has been increased annually for three decades. Realty Income's business has grown slowly, however. The annualized dividend growth over that span was just 4.3%. This isn't a company that's likely to interest growth investors, and dividend growth investors might take a pass on it, too, given the single-digit dividend growth path. But Realty Income comes with a 5.6% dividend yield today. Income investors will likely find that very attractive.