Understanding Why Costco's Dividend Remains Underrated: What That Really Means

When investors think of Costco Wholesale (NASDAQ: COST), they typically focus on its exceptional stock price appreciation. Over the past five years, the company’s shares have soared more than 170%, far outpacing the S&P 500’s approximately 80% gain during the same period. Yet there’s an often-overlooked aspect of this retailer’s investment profile: what it truly means for a dividend to be underrated, and why Costco’s income component deserves greater recognition among long-term investors.

The term “underrated” carries a specific meaning in investment circles—it refers to assets whose real value or benefits are not properly appreciated by the broader market. In Costco’s case, this concept directly applies to how investors perceive its dividend income.

The Deceptive Truth Behind Low Yield Numbers

At first glance, Costco’s 0.5% dividend yield appears unimpressive compared to other income-generating stocks. However, this surface-level metric masks a more nuanced reality. The company’s modest yield doesn’t reflect weakness in its dividend strategy; rather, it represents the consequence of the stock’s remarkable price appreciation.

When a company’s share price climbs substantially, the yield mechanically declines, since the dividend payout remains fixed while investors pay more to acquire those shares. Understanding this relationship is crucial to avoiding the mistake of dismissing Costco’s income distribution as insignificant.

The Substantial Dividend Growth Story

The real story emerges when examining Costco’s dividend trajectory. In early 2020, the company distributed a quarterly dividend of just $0.65 per share. By 2026, this had doubled to $1.30—a compounded annual growth rate of 12.2%. This robust expansion demonstrates management’s commitment to returning capital to shareholders.

Beyond regular dividend increases, Costco has demonstrated additional generosity through special dividend payments. In 2020, shareholders received a one-time payment of $10 per share, followed by a $15 per share special dividend announced in 2023. These discretionary distributions are particularly telling, as they reflect management’s confidence and the company’s ability to generate substantial free cash flow.

Why Long-Term Holders Benefit From This Often-Missed Advantage

For investors with a multi-year or multi-decade time horizon, Costco’s dividend profile transforms from seeming underwhelming to genuinely valuable. The compounding effect of rising dividend payments, combined with occasional special distributions, creates meaningful accumulating returns that compound over time.

This benefit becomes particularly relevant given Costco’s current valuation. Trading at more than 50 times earnings—a considerable multiple for a retailer growing at single-digit rates—the stock demands a commitment to long-term ownership. Short-term traders may struggle with this valuation premium, but investors willing to hold for years can capture value not just from potential price appreciation, but from the steadily increasing income stream accompanying their investment.

Evaluating Costco as Part of a Comprehensive Strategy

The dividend should not serve as the primary investment thesis for Costco, but dismissing it entirely would be equally misguided. The balanced perspective views this income component as a valuable supplementary benefit to long-term portfolio holders—one that becomes increasingly meaningful as dividend increases compound over decades.

Before making any investment decision, potential shareholders should recognize that while Costco was excluded from the Motley Fool Stock Advisor’s recent list of the 10 best stocks for investors, this analysis comes from the same team that identified Netflix in 2004 (an investment that would have grown $1,000 to over $461,000) and Nvidia in 2005 (generating approximately $1.15 million from the same initial investment). The Stock Advisor’s historical average return of 950% substantially exceeds the S&P 500’s 197% performance.

For those seeking to understand what “underrated” truly means in the context of dividend investing, Costco presents an instructive case study: sometimes the most overlooked benefits are precisely those worth examining most carefully.