Since going public in late 1985, Costco Wholesale(NASDAQ: COST) stock is up nearly 80,000% and that's before factoring in dividends. To make this percentage more tangible, if an investor put $10,000 to work in Costco stock in 1985, they'd have nearly $8 million today.
Even if investors had waited until five years ago to buy Costco stock, they'd still be up more than 200%. That's more than double the return of the S&P 500 during this time.
Costco stock has been a life-changing investment for many people but I don't expect returns over the next five years to be quite as good as days past. Its growth is slow and the valuation of its stock is expensive -- both of these factors could negatively impact returns for shareholders.
That said, investing is personal and different investors have different goals. Some dividend investors are simply looking for a safe dividend that can provide growth that outpaces inflation. And for these investors, Costco stock is certainly one that can be bought and held forever. Here's why.
Why Costco is a forever dividend stock
I should mention up front that no stock is a forever stock in the strictest meaning of the word -- the world is constantly changing and companies unexpectedly get left behind. That said, Costco sells groceries and household goods that will likely always be in demand, giving a very high degree of certainty that this company does business in a forever category.
This retail business is absolutely enormous. Costco has more than $240 billion in trailing-12-month net sales, showing that it's one of the biggest retail businesses in the world. However, astute investors know that retail sales aren't the company's primary source of profits.
In its fiscal second quarter of 2024 (its most recent quarter, ended on Feb. 18), Costco's gross margin on merchandise sales was less than 11%. For comparison, the gross margin for rival retail chains Walmart and Target is 24% and 28%, respectively.
However, Costco is a membership-based business. And its membership fees are basically pure profit. In Q2, the company made over $1.1 billion from its memberships, which was up 8% year over year. And importantly, its renewal rate remained high in Q2 at 93%. In other words, this is a reliable stream of recurring revenue.
Turning to its dividend, Costco pays quarterly dividends and often pays special dividends as well. But special dividends are hard to predict. Therefore, I just want to focus on the quarterly dividend.
Costco has paid and increased its quarterly dividend for 19 consecutive years now. And it currently pays a quarterly dividend of $1.02 per share. For perspective, it earned nearly $4 per share in Q2 net income, meaning that the company is only paying out a small amount of its profits as a dividend right now. This leaves plenty of room for future dividend increases.
Costco is likely to annually increase its dividend for many years because it has room. And most of its profits come from membership fees, which have a high retention rate -- meaning it will likely still have room to increase its dividend in the years to come. However, there's one more reason that Costco could be a forever dividend stock.
Costco hasn't increased the price of its memberships since 2017. But on the Q2 earnings call, outgoing CFO Richard Galanti said it's a matter of "when, not if." In other words, the company will raise its membership prices at some point. This will boost its overall profits, providing even more room for future increases to the quarterly dividend.
As mentioned earlier, for investors looking to outperform the market average today, it might be best to wait for a better valuation for Costco stock. However, for those looking to lock in a predictable dividend that's poised to increase annually for years to come, then Costco stock is a great candidate.
Should you invest $1,000 in Costco Wholesale right now?
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Jon Quast 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.
