Here’s what I do with Costco’s $15 special profit

One of the biggest retailers just shared huge news. A special dividend of $15 is issued to shareholders. This is certainly a welcome turn of events Costco wholesale (it costs 0.06%) investors, which represents about a 2% dividend yield at the current stock price. But what should investors do with this impressive boost? Well, you have two options. Let’s look into them.

Reinvesting was a genius strategy

The main decision investors have to make about a dividend is whether to put the money in their pocket or reinvest it in the company. By putting it in your pocket, you’re looking to spread it toward another investment or perhaps spend it. Regardless, if you don’t reinvest it now, you probably won’t use it to buy Costco stock later.

But buying Costco stock with its own dividends was a winning strategy. This isn’t the first time, and likely won’t be the last, that Costco has issued a special dividend. Costco issued special dividends in 2012 ($7), 2015 ($5), 2017 ($7), 2020 ($10), and now $15 in 2023.

So, what would have happened to your money if you had reinvested your profits in Costco versus the market for these payments?

Data source: YCharts.

As you can see, reinvesting dividends into Costco stock has been a great strategy. But even if you’re not a Costco shareholder, you can still get in on the action. The special dividend date is December 27, 2023, which means that as long as you own shares when the market closes on that day, you will receive the dividend.

But that was just one part of Costco’s earnings call; There’s also Costco’s profits to consider.

Costco stock is not cheap at all

For the quarter ending November 26, Costco’s revenue rose 3.8%, which isn’t amazing. One reason for this small growth is that Costco deals with difficult year-over-year comparisons with big-ticket items (such as laptops or televisions). Those big sales were down 20% online and 17% in-store. These comparisons are difficult to deal with, but they will disappear within a few months once current consumer trends overlap.

However, Costco’s earnings per share (EPS) rose from $3.07 to $3.58 – an increase of 17%. That’s market-beating growth, making Costco a worthwhile investment.

One thing that’s worrying many investors right now is Costco’s stellar valuation. At 48 times earnings and 43 times forward earnings, Costco is one of the most expensive stocks on the market.

Cost to profitability ratio Data by YCharts.

However, one factor that should cause its valuation to drop is the announcement of an increase in membership fees. It’s not known when Costco will do this, but management has said it will come. This would be a huge increase in profits because the membership fee is pure profit.

Should investors buy Costco stock now? I’d say there’s never been a bad time to buy Costco stock in its history. Although the stock is not cheap at all, that has not stopped it from being a long-term market speculator. As a result, I think investors would still be OK with creating a position or reinvesting their profits in Costco stock.