Best Stock to Buy Right Now: Costco vs. Realty Income

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.

COST data by YCharts.

Which is the better buy today?

What's interesting is that both Costco and Realty Income are down around 10% or so from their 52-week highs amid the market correction. However, Costco is around 10% off its all-time highs, while Realty Income is off its high-water mark by more than 25%. From this perspective, it seems likely that Realty Income is the better value right now. That's buttressed by the fact that its dividend yield is near the highest levels of the decade, while Costco's yield is near its decade low point.

Costco is a great company with a very strong business model, but it is no bargain today. So even growth investors will probably want to keep it on the wish list for now. Realty Income, on the other hand, appears fairly priced, if not cheap. Given its lofty yield and strong business model, it could reward dividend investors with an attractive income stream for years to come.

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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Costco Wholesale and Realty Income. The Motley Fool has a disclosure policy.