Costco Is a Dividend Stalwart. Should You Add It to Your Portfolio?

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.

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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.

Still, investors may balk at its valuation as analyst's fiscal 2025 profit forecasts predict only 13% annual profit growth. With the forward P/E ratio of 58, that current rate of net income increase arguably does not justify its current multiple.

If investors agree, Costco stock could suffer a significant pullback, and the 0.4% dividend yield will likely not be much consolation to its shareholders if that happens.

Should I add Costco stock to my portfolio?

Under current conditions, both income and growth investors should probably not add shares of Costco stock.

Admittedly, Costco likely fits the definition of a dividend stalwart. Its payout has risen for 21 straight years, and the special dividends serve as welcome bonuses to its shareholders.

Nonetheless, the dividend is likely too small to be a factor in this stock except for its longest-term shareholders. At a yield of 0.4%, the retail stock will probably not attract income investors, especially when its peer Target offers shareholders dividend growth with almost 9 times as much yield.

Additionally, growth investors may question whether they want to buy at current levels. Its P/E ratio is at an all-time high at 62, and income growth in the low double digits is probably not enough to justify that earnings multiple.

Ultimately, Costco remains one of the world's most successful retailers, and the company's business and financials indicate it will remain strong. However, between the low dividend yield and high valuation, investors can probably earn higher returns in other retail stocks.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.