Costco Wholesale Stock Loses to 10-Year U.S. Treasury Notes on Yield. Here's Why It Wins on Everything Else.

The 10-year U.S. Treasury note rarely looks this appealing. Its yield reached 5.22% on Oct. 8, according to Federal Reserve data, the highest reading since March 2002. Costco Wholesale (NASDAQ: COST) offers a forward dividend yield of 0.6%.

Put $10,000 into each, and the Treasury hands you payouts of about $520 a year while Costco sends you around $60. Why bother?

But income is only one piece of an investment's return, and for long-term investors, it's often a small part.

The hot dog doesn't get bigger

Like Costco's famous hot dog and soda combo (still $1.50 after 41 years), Treasury coupons have a fixed value. A 10-year note's coupon rate is locked for 10 years. The interest you receive in 2036 will match next spring's payment to the penny, even after a decade of inflation.

Hold to maturity, and you get your original $10,000 back; it'll just buy less stuff than it does today. The coupon payouts you receive along the way will help, assuming the rate you locked in remains ahead of average inflation.

Rate changes only matter if you sell your Treasuries before maturity. No one will pay full price for your note if new Treasuries offer better rates, but your note will gain value when rates go down.

But Costco's dividend has grown 13.2% per year over the last five years. The company also has a habit of surprising shareholders with special dividends, such as the $15-per-share dividend it paid in January 2024. That one-time payment was roughly equivalent to 15 of the regular quarterly payouts at the time.

The business behind the stock

Stocks let you own a small piece of an actual business. People work hard to increase the corporation's value, which over time lifts the stock price. No empire lasts forever, but Costco's story started decades ago, and it's still a market-beating growth stock.

Costco generated $303.2 billion in sales over the past 12 months, up 10.1% year over year. Earnings per share rose 13.9% over the same period. The company keeps markups low, with a gross margin of just 12.8%, and earns a large share of its operating profit from membership fees.

As a result, $10,000 invested in Costco stock 10 years ago would be worth $63,340 today. With reinvested dividends, you're looking at $74,980 instead:

COST data by YCharts

10-year Treasury notes yielded about 1.8% in October 2016. A $10,000 investment would pay out $11,800 in total over the same decade. That's your original $10,000 plus $1,800 in coupon payouts. Treasuries bought today will pay out roughly $5,200 over the next 10 years (plus the $10,000 return of principal), but that's still a forgettable gain next to Costco's long-term returns.

The catch

Costco's stock isn't cheap, exposing investors to valuation risk. It trades at 46 times trailing earnings and 38.2 times forward estimates, which is a rich price for a company expected to grow earnings about 9.7% annually.

The stock gained just 2.8% over the past year, trailing the Treasury's yield, and sits 12.8% below its 52-week high as of Oct. 12.

Image source: The Motley Fool.

Pick your cart

If you need reliable income soon, the Treasury is a fine choice at 5.2%. But if you don't need the money for the next 10 years, Costco offers a few things that the Treasury note can't: a business that keeps growing, a dividend that keeps rising, and a long record of turning patient money into a much bigger pile.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.