3 Reasons to Buy Costco Right Now, and 1 Reason to Avoid It

Walmart and Amazon have been go-to shopping destinations for Americans for quite a while now, but in recent years, a new favorite has emerged in Costco (NASDAQ: COST). It has many of the same items you can find in those stores, but it sells them in bulk. It's a go-to for many families across the country.

Costco's stock has also been a go-to for many investors, up 145% over the past five years, compared to the S&P 500's (SNPINDEX: ^GSPC) 77% gain and the Nasdaq Composite's (NASDAQINDEX: ^IXIC) 85% (as of June 22).

If you're interested in Costco's stock, here are three reasons you should do so and one reason you should be hesitant right now.

Image source: The Motley Fool.

1. Costco has a reliable income source beyond retail

Although Costco is a retail store, its business model revolves around its membership program and fees. As of its fiscal year 2026 third quarter (ended May 10), Costco had 148.5 million cardholders and 82.9 million paid memberships, up 4.1% from last year.

Consumers like Costco's value proposition, and it shows in membership numbers and retention. Although Costco's paid memberships increased by only 4.1%, its membership income grew by 10.7% due to fee increases. And even with the price hike, American and Canadian members renewed at 92.2% and 89.7%, respectively.

Having millions of people willing to consistently pay for a membership to shop at your store puts Costco in a unique position compared to other brick-and-mortar retailers like Walmart and Target.

2. A change in approach means more growth opportunities

If you've ever been inside a Costco store, you know just how huge they tend to be. And even beyond the store itself, there's typically a large parking lot and a gas station. The amount of real estate that Costco stores command has limited where the company can open stores, especially in larger cities.

Costco is now embracing nontraditional store setups that could expand its total addressable market. This includes having multifloor stores integrated with high-rise buildings and other residential structures, giving it many more options for opening stores.

The chance for a large one-story store with a hundred parking spots is extremely slim in Manhattan, but a multifloor store inside an already established skyscraper is much more feasible. This new approach should help keep Costco's growth prospects strong.

3. An underrated dividend that can pay off in the long run

Costco probably isn't the first stock that comes to mind when you think of dividend stocks, which makes sense given its average 0.6% dividend yield over the past five years. That's low by almost all standards and less than you'd receive by investing in an S&P 500 ETF.

That said, the main appeal of Costco's dividend right now is its track record of annual increases. The company has increased its annual dividend for 22 consecutive years since it began paying one in 2004. In the past decade, its dividend has increased by 226%, including a 13% bump just this year.

Costco is also known for its one-off, specific dividends, with the last one being a $15 payout in January 2024. This is a nice reward that could meaningfully add to your total returns over time.

COST Dividend data by YCharts

The red flag with Costco's stock

Costco is a great company and will be a retail giant for quite some time. However, when it comes to investing in the stock, there's one glaring red flag that you shouldn't completely skim over: its valuation.

At the time of this writing, Costco is trading at 46.1 times its projected earnings over the next 12 months. That's more expensive than even some of the fastest-growing tech stocks in the world, which are notorious for their high valuations.

COST PE Ratio (Forward) data by YCharts

The high valuation alone doesn't make Costco's stock a no-go. But investors should be aware that investing in stocks when they're expensive could limit their upside or increase the risk of a pullback (it's down 13% since its May 19 all-time high).

Costco is a stock I would own, but I'd approach it with dollar-cost averaging rather than investing a lump sum.

Stefon Walters has positions in Apple, Microsoft, and Walmart. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, Target, and Walmart. The Motley Fool has a disclosure policy.