The Best Dividend Stocks to Buy Right Now: Costco vs. Realty income

On the surface, retailer Costco Wholesale (COST -0.77%) and real estate investment trust (REIT) Real estate income (A 0.57%) they have little in common.

One of the biggest differences between these reliable dividend stocks today is found on the valuation front, with Costco looking historically expensive and Real Estate Income relatively cheap. Many investors, especially those looking for yield, will probably find Realty income more interesting.

But is it the right move to make? Let’s see.

Costco does a lot of things right

There is no doubt that Costco is a well-run retailer. However, you have to understand that it is not a normal retailer, because it operates with a club model. That means customers pay an annual membership fee for the privilege of shopping in the company’s stores. Membership fees account for about 50% of Costco’s operating profits.

This is important because it allows Costco to focus more on customer service. This includes ensuring a great shopping experience thanks to happy employees and low prices, as membership fees allow the company to accept lower margins on product sales. The problem is that Wall Street is well aware of Costco’s success, and the stock is currently trading near all-time highs. It’s not cheap – the price-to-earnings ratio is 53, which is also near all-time highs.

While Costco has a long history of rewarding investors with annual dividend increases (20 straight years and counting), the stock is clearly being offered at a premium. In fact, the yield, at around 0.5%, is near the lowest levels in the company’s history. Most dividend investors should probably put Costco on their wish list, not their buy list.

COST data by YCharts.

Realty Income is a high-yielding retail landlord

Realty Income’s dividend yield is a much more attractive 5.2%. Although the yield has been higher in the past, it is at the upper end of the yield range over the past decade and above the 10-year average yield of 4.5%. Although Realty Income shares have been on the rise lately, it’s still an attractive option for those looking for yield. Note that the dividend has been raised annually for nearly three decades.

O Dividend yield data by YCharts.

But the interesting thing about Realty Income compared to Costco is that 73% of the rental value comes from single-tenant retail assets. Retail concepts fall in and out of favor, but prime retail locations tend to remain attractive for decades. Realty Income has a wealth of well-located properties in its portfolio of more than 15,400 assets. It is, indirectly, a way to generate revenue from retailers — just with a less specific retail concept risk, as the REIT can free up a space facing a vacancy.

The only problem here is that Realty Income is a slow and steady turtle compared to a company like Costco. For example, over the past decade, Costco’s dividend has grown more than 220%, compared to about 40% growth for Realty Income. However, if you’re looking for current income right now, Realty Income’s dramatically higher income yield will likely win you over.

COST Per Share Data (Quarterly) by YCharts.

When you add in the valuation factor, with Costco’s price a bit high and Realty’s earnings more attractive, there are even more reasons to consider the REIT today.

You need income and you need income growth

Costco is expensive right now, and most investors should probably stay on the sidelines. Real estate income is more attractively priced and offers a much more generous yield. But don’t discount Costco, or similar stocks with strong dividend growth.

It’s a good idea to build a base of high-yielding stocks like Realty Income that you can supplement with some faster-growing dividend offerings. Costco could, should there be a deep enough pullback, be just such an offering. For now, however, this pair’s best bet is still high-yield real estate income.