Last week, Costco Wholesale (NASDAQ:COST) announced that it was raising its dividend from 90 cents per share to $1.02, for an increase of 13%. With the increase, investors will now be collecting $4.08 per share over the course of a full year, which equates to a yield of 0.81%. That's a relatively modest payout when you consider the S&P 500 average yield is 1.7%. It would take an investment of more than $123,000 in Costco stock to earn $1,000 in dividends per year.
Over the years, however, Costco has been consistently raising its dividend payments. Five years ago, in 2018, the quarterly dividend was $0.57 – it has risen by 79% since then, averaging a compounded annual growth rate of 12% during that stretch.
And while Costco's stated dividend yield may be unimpressive, the company has also paid special dividends in the past. Although special dividend payments are nonrecurring and typically happen when a company has a strong year (such as in 2020 when Costco issued a $10.00 per share special dividend), that can significantly boost the dividend payment for investors. The benefit of a special dividend is the company rewards shareholders in a strong year without having to offer a high dividend that could otherwise put a strain on its cash flow.
If Costco were to continue raising its dividend at a rate of 13% annually, it would take about six years for the dividend to double. Given the company's strong business, dividend growth, and occasional special dividend, Costco's stock can make for an underrated income investment to buy and hold.
