Costco Just Hiked Its Dividend By Double-Digit Rates. Time to Buy?

The past half decade has been a tumultuous time for retail. There was a pandemic with the forced closure of large swaths of the economy, only to be followed by a bout of “revenge shopping” upon reopening. Soaring inflation, historic high interest rates, and now a looming recession have all created turmoil, and sometimes bankruptcy, for retailers.

Standing tall throughout the chaos has been warehouse club Costco (NASDAQ:COST | COST Price Prediction), which has watched its business thrive and its stock soar. Where the S&P 500 has gained 92% over the last five years, COST stock has rocketed 220%. If you include dividends, returns are closer to 250%.

Even this year, with a tariff-tossed market that sent the benchmark index careening lower into correction territory, Costco is up more than 6% year-to-date and 35% higher over the past 12 months (the S&P 500 is up just 6%).

That resilience in times of trouble is what makes the warehouse club stand out as an investment along with its willingness to reward shareholders by paying a dividend.

An all-weather retailer

Costco is an enduring, recession-proof business, a not unimportant consideration with economists forecasting one is on the horizon by either the end of this year or the beginning of 2026. 

The reason for its armor-plated endurance is the value proposition it offers. Low-cost, bulk-buying allows inflation-pinched consumers to stretch their dollars further. And they remain loyal. Adjusted comparable sales for the fiscal second quarter jumped 8.6% from the year-ago period while e-commerce comps surged 22%.

While Costco is at risk from tariffs — if the scheme is eventually implemented — because it imports most of its goods. Yet their impact could also be mitigated since a trade war would raise costs at its competitors, too. Still, higher prices could result in consumers cutting back spending, but at the moment those concerns are on hold.

Costco is an impressive growth story beyond just its share price. The retailer’s earnings not only are growing, but are steadily increasing year after year. Stocks with predictable cash flows shine brighter than others and investors flock to those companies able to grow earnings. 

It likely explains COST stock’s growth over time, regardless of market conditions. Its dividend is undoubtedly another reason.

A solid, dividend growth stock

Although Costco’s dividend only yields 0.5% annually, it has also been paying out significant special dividends to shareholders every couple of years. The last special payout, in 2023, was for $15 per share. Three years prior to that it was $10 per share. So even their special dividends are rising over time too.

Costco has increased its dividend at 13% compound annual growth rate for the last decade, a fairly robust rate. That’s been possible because free cash flow has grown at nearly the same CAGR for just as long. 

With an earnings-based payout ratio of just 19% and a FCF ratio of 18%, not only is there no risk of a dividend cut, but the payout has plenty of room for future and even bigger increases.

The retailer just announced it was raising the dividend again, this time by 12% to $1.30 per share, right in line with its long-term policy.

So is COST stock a buy?

Despite Costco trading only 10% below its 52-week high, shares remain attractively priced. COST sports an adjusted P/E of 17, well below its five-year average of 43, a similar spread to its forward earnings multiple. At less than twice sales and only 11x cash flow, the retailer is a discounted stock.

Particularly if the feared recession does hit, Costco will have the ability to grow sales, profits, and even its dividend as consumers shop its warehouse clubs. This is one retailer that should be on your short list of stocks to buy.

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