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One part of owning Costco Wholesale (NASDAQ: COST) that many investors overlook is the dividend. That may seem surprising since its payout has risen annually since its introduction in 2004. Also, the company will periodically reward its shareholders with special dividends, the most recent of which was a $15-per-share payout in January 2024.
Nonetheless, the decision to buy a stock almost always hinges on more factors than its dividend, even for those who invest primarily for income. Hence, investors need to evaluate both the payout and the overall value proposition of the stock to make such a determination.
The Costco dividend
Currently, Costco pays its shareholders $4.64 per share in dividends. Additionally, it is a dividend the company can easily afford.
In the first quarter of fiscal 2025 (ended Nov. 24, 2024), Costco generated about $2.2 billion in free cash flow and made dividend payments of $515 million. Thus, it can not only cover the dividend but also afford considerable payout hikes.
Unfortunately, the appeal of the dividend tends to drop significantly when one finds the dividend yield is only 0.4%. This is far below the S&P 500 average of 1.25%.
Moreover, in 2024, a year that included a special dividend and a payout hike in the spring, shareholders earned $19.50 per share in dividend income. Still, when compared to the current share price, that takes the yield to less than 1.9%.
In comparison, Walmart's current dividend yield is 0.9%, while Target's payout returns 3.5% to shareholders. Since both do not include special dividends, it shows how little a Costco shareholder makes from the dividend yield.
But what about the stock?
Admittedly, many long-term shareholders may feel like they have good reason to dismiss the dividend when pondering the investment thesis. Costco stock is up by over 40% last year not including the payout, which far exceeds the total returns of the S&P 500.
That has occurred under a steady but relatively slow expansion. As of the end of fiscal 2024 (ended Sept. 1, 2024), Costco operated 890 warehouses worldwide, 31% of which are outside of the U.S. The company also plans to open an additional 29 locations in fiscal 2025, and renewal rates run at around 91% globally, a testament to the store's enduring popularity.
Its growth has taken the P/E ratio to 62, an all-time high for its earnings multiple. Also, Costco has successfully grown revenue under a variety of economic conditions. Hence, it is likely not surprising that in fiscal 2024, net income of $7.4 billion, a 17% yearly increase, and profits rose 13% in the first quarter of fiscal 2025.