A Costco Special Dividend Could Be Coming, but Walmart Has Raised Its Dividend for 53 Consecutive Years. Here's the Better Buy Now.

Most investors buy dividend stocks to create a reliable income stream to pay bills. Costco (NASDAQ: COST) and Walmart (NASDAQ: WMT) are both reliable dividend stocks. But they have taken dramatically different approaches with their dividends. For most, Walmart and its roughly 0.9% yield will be a better fit than Costco's 0.6% yield. Here's why.

Neither stock is cheap

Before getting into the relative merits of Walmart and Costco and their dividend policies, it is important to address the value equation. Neither of these globally dominant retailers is cheap right now. Each company's price-to-sales and price-to-earnings ratios are above their five-year averages. And their yields are both below that of the S&P 500 index (SNPINDEX: ^GSPC). If valuation is important to you, you'll probably want to keep these stocks on your wish list.

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That said, Walmart's yield is materially higher than Costco's. Sure, 0.3 percentage points doesn't seem like a lot on an absolute basis, but it is 50% more income. If you are trying to live off of your dividend, as many dividend investors are, that makes a big difference. The fly in the ointment is that Costco has a history of paying very large special dividends. It paid special dividends of $7 per share in 2017, $10 per share in 2020, and $15 per share in 2023. Given the cadence, another one could be on the way soon.

It is hard to argue with a huge dividend like that, but you can't budget around special dividends. Maybe one gets paid soon, maybe it doesn't. There's no way to tell. Walmart has increased its dividend every year for 53 years, making it a Dividend King. While Costco is no slouch, with more than two decades of regular dividend hikes, it just doesn't have the same track record. Add in the relatively higher yield on offer from Walmart, and most dividend investors will probably prefer Walmart.

Costco wins on dividend growth

That said, if you are looking for a dividend growth stock, the story switches. Over the past decade, Walmart's dividend has grown at around 4% a year. Costco's dividend has grown at a 10% rate over the same period. If you reinvest dividends and add in the special dividends along the way, Costco is likely to be a more attractive dividend growth option. But you will be paying an even larger premium for the stock than you would pay with Walmart.

The caveat with both stocks, however, is valuation. Neither is cheap today, and anyone with even the slightest value bias will probably be better off putting both of these industry-leading retailers on their wish list. But if you feel you have to buy, Walmart probably wins for income, while Costco stands out for dividend growth (with any special dividend that may get paid being an added bonus).

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.