Better Dividend Growth Stock: Costco vs. Visa

When market volatility strikes, dividend stocks serve as financial fortresses for investment portfolios. Hartford Funds research has revealed a striking fact: A remarkable 85% of the S&P 500 cumulative total return since 1960 comes directly from reinvested dividends and compounding power. Even more noteworthy, dividend growers have consistently outperformed the broader market since 1973 while maintaining lower volatility throughout market cycles.

Among the elite dividend payers, two blue chip companies stand out: retailer Costco Wholesale (NASDAQ: COST) and payment processor Visa (NYSE: V). These powerhouses sport double-digit dividend growth, battle-tested business models, and formidable competitive moats that promise continued payout increases for years ahead. However, their distinct business approaches, yield characteristics, and growth patterns may attract different types of dividend-focused investors.

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For investors looking to harness the proven advantage of dividend growth investing, which of these dividend titans offers the more compelling opportunity right now? Let's break down each company's key dividend metrics and core value proposition to determine which stock scans as the better buy.

The case for Costco Wholesale

Costco has evolved from humble beginnings into a global retail juggernaut with an exceptionally loyal customer base. Its membership model creates predictable revenue streams while delivering unbeatable value to consumers. Despite operating with thinner margins than typical retailers, Costco has consistently delivered outstanding operational and financial results.

The dividend story at Costco showcases a clear commitment to shareholder returns, with 20 consecutive years of payout increases. Dividend growth has been robust, averaging 12.6% annually over the prior 10-year period, significantly outpacing inflation and reflecting management's confidence in the business model's sustainability.

While Costco's current 0.47% dividend yield might seem underwhelming, this meager yield reflects the stock's strong price appreciation rather than dividend weakness. Costco stock has significantly outperformed the S&P 500 since the start of 2015:

^SPX data by YCharts

Costco's conservative 27% payout ratio provides substantial room for future dividend increases regardless of economic conditions. With $250 billion in net sales for the fiscal year 2024 (a 5% year-over-year increase) and a growing membership base of nearly 137 million cardholders, Costco has built a reliable foundation for sustained dividend growth. (Costco's fiscal year ends in early September.)

The company's exceptional cash-flow generation, minimal debt, and disciplined capital allocation further strengthen its dividend growth prospects. With its straightforward yet powerful business model showing remarkable resilience against multiple competitive threats, Costco presents a compelling opportunity for dividend growth investors seeking both rising income and capital appreciation potential.

The case for Visa

Visa stands as a global payments technology titan, operating one of the world's largest electronic payment networks connecting consumers, merchants, financial institutions, and governments across more than 200 countries. Unlike traditional financial companies, Visa doesn't issue cards, extend credit, or set rates. Instead, the company provides the secure infrastructure and innovation that powers digital commerce worldwide.

The company's dividend growth story is extraordinary, with a 10-year dividend growth rate of 17.5%, substantially exceeding Costco's notable 12.6%. Visa has increased dividends for 16 consecutive years, putting it in the top ranks of dependable dividend growth stocks.

Current income seekers will appreciate Visa's more generous yield of 0.71% compared to Costco's 0.47%. While neither stock would be classified as a high-yield investment, Visa provides over 50% more current income per dollar invested. Furthermore, Visa maintains an even more conservative payout ratio of just 21.7%, suggesting substantial runway for continued dividend increases at or above the historical growth rate.

What makes Visa particularly compelling from a dividend growth perspective is the business model, which features extraordinarily high margins, minimal capital expenditure requirements, and significant barriers to entry. The company essentially operates a toll-road business model where Visa collects a small fee on virtually every transaction flowing through its network, without assuming credit risk or maintaining expensive physical infrastructure.

As global commerce continues its relentless shift from cash to digital payment, Visa should benefit from both increased transaction volumes and expansion into emerging markets where cash still dominates. This structural growth driver, combined with the asset-light business model, positions Visa to continue generating the robust free cash flow needed to sustain its stellar dividend growth trajectory.

Which dividend grower is the better buy?

For investors primarily focused on dividend growth potential, Visa emerges as the more compelling option. The substantially higher historical growth rate, lower payout ratio, and higher current yield all favor the payment processor in this matchup. The asset-light business model and exposure to the secular trend of digital payment adoption also create a powerful foundation for continued double-digit dividend increases.

However, the ideal situation for many dividend growth investors may be to include both stocks in their portfolios. With different business models and industry exposures but similar commitments to shareholder returns, Costco and Visa complement each other effectively within a diversified dividend growth strategy. Both companies appear well-positioned to continue rewarding patient shareholders with growing income streams for years to come.

If you can only choose one of these incredible dividend stocks, however, Visa rings up as the modestly better choice in this comparison.

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George Budwell has positions in Costco Wholesale and Visa. The Motley Fool has positions in and recommends Costco Wholesale and Visa. The Motley Fool has a disclosure policy.