Best Stock to Buy Right Now: Costco vs. Agree

At first glance, it seems like Costco (NASDAQ: COST) and Agree Realty (NYSE: ADC) would be an apples-to-oranges comparison. In some ways, that's true.

But the link is that Agree's business is leasing out properties to what it hopes are well-run retailers, which is what Costco happens to be.

Here's why you might want to go with one over the other.

Retailers versus landlords

Consumers are incredibly fickle. They shift from store concept to store concept based on things like fashion trends and economic activity. There's a huge amount of risk when you buy a retailer because you are betting on one company's success when people could easily move on to a different retail concept. It's why some investors prefer to own retail landlords instead.

It isn't that landlords, like real estate investment trusts (REITs), don't care who leases their properties. A bad tenant can, indeed, create financial problems for a REIT. But most REITs have more than one tenant, diversifying the risk caused by any one troubled tenant. The property that a REIT owns also has intrinsic value. It can be sold or leased again if needed. Instead of trying to pick a retail winner, you can just focus on a REIT with good properties.

This is the basic comparison when looking at Costco and Agree. But there's a slight twist here, because both are growth-oriented businesses, and valuation-wise, both are at least a little on the expensive side.

Costco is excelling, and Agree is a speedy tortoise

Costco is a club store. That means customers pay a membership fee for the privilege of shopping in one of the company's stores. Those membership fees are an annuity-like income stream that helps Costco better compete with other retailers. Essentially, it can afford to accept lower margins, which keeps product costs low for customers. While the selection in the stores is limited, that hasn't stopped the company from growing steadily for years.

Investors have noticed Costco's success. The stock is up 500% over the past decade. The dividend yield is currently around 0.6%, which is near the lowest levels of the past 10 years. That said, Costco has never been a particularly high-yielding stock. Its five-year average yield is 0.8%. Still, the yield is low on both an absolute and relative level, compared to its own history.

Agree's business model is, essentially, to buy new buildings so it can grow its portfolio. That, in turn, allows it to pass a growing income stream on to shareholders in the form of dividends.

REITs are specifically designed to pay dividends. The company has grown its portfolio pretty steadily over the past decade, leading investors to reward it with a 130% share price increase. But the yield is around 4.2%, which is actually higher than the stock's 10-year average yield and roughly middle-of-the-road for the REIT. It looks far more reasonably priced and offers a materially higher income stream than Costco.

What are you looking to achieve?

Costco is a very well-run retailer, but Wall Street knows it. While the stock has pulled back a little more than 10% from its recent highs, it isn't cheap by any stretch of the imagination. You need to believe that the company's store concept will continue to resonate well if you're going to buy Costco shares. That's not unreasonable given the success the company has achieved, but given the tiny yield, you're counting on further stock price appreciation to drive your returns.

Agree Realty is a more diverse growth story in the retail space because it isn't a bet on a single store concept. It trades at a premium to peers. In comparison, Realty Income (NYSE: O), the largest competitor in the space, has a yield of 5.4%. However, Agree's 4.2% yield looks reasonably priced compared to its own history. If you don't want to take on the idiosyncratic risk of owning a single retail concept, Agree looks like it could be a more attractive choice than Costco.

Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Costco Wholesale and Realty Income. The Motley Fool has a disclosure policy.