Top Dividend Stocks Battle: Which Wins?

Key Points

When considering dividend stocks, many investors focus on high-yielding names such as utilities or telecom companies. However, some of the best opportunities can come from companies with lower payouts. Membership-based wholesale retailer Costco and Google parent Alphabet are two such examples. Both have low dividend yields, but they offer strong growth potential and unique advantages that make them compelling investments.

Costco: Dependable Income at a High Price

Costco has built a reputation for consistency, and its dividend reflects that reliability. The company maintains a payout ratio below 30%, which allows for steady reinvestment and consistent dividend increases over time. In fact, Costco has raised its dividend every year for more than two decades, with recent annual growth rates around 13%. The most recent increase came in spring, when the quarterly dividend was raised to $1.30, resulting in an annual payout of $5.20 and a yield of approximately 0.5%.

In addition to its regular dividend, Costco occasionally pays out special dividends. For example, in early 2024, shareholders received a $15 special dividend. These occasional payments can significantly boost returns for long-term holders, even though they are not frequent.

However, one major drawback is Costco’s high valuation. Shares trade at more than 50 times earnings, which is a steep multiple for a company that grew sales and earnings per share by 8% and 13%, respectively, in its most recent quarter. While this premium reflects the quality of the business, it also leaves little room for error. Investors buying now should expect modest returns unless Costco delivers unexpected upside.

Alphabet: Small Yield, Big Upside

Alphabet, on the other hand, only started paying dividends in 2024, so it doesn’t have the long track record of Costco. Its current annual dividend is $0.84 per share, resulting in a yield of about 0.4%. However, the payout ratio is less than 10%, leaving ample room for future increases if management decides to raise the dividend.

Alphabet is also heavily investing in its business, particularly in artificial intelligence (AI) and cloud infrastructure. These investments have temporarily impacted free cash flow, but they are aimed at capturing long-term growth opportunities. Alphabet's diversified revenue streams—advertising, YouTube, and Google Cloud—are all performing well, contributing to strong growth.

Valuation is a significant advantage for Alphabet. Shares trade at about 21 times forward earnings, much lower than tech peers like Microsoft and Meta and far below Costco’s multiple. This makes Alphabet a more attractive option for investors looking for growth potential without paying a premium.

A Clear Winner

While both Costco and Alphabet may appear to be low-yield stocks, they represent different types of dividend investments. Costco offers a safe, predictable payout with occasional special dividends, but at a high price. Alphabet, by contrast, is just beginning to reward shareholders with dividends, offering a small yield that could grow substantially over time.

More importantly, Alphabet’s valuation is significantly cheaper than Costco’s, making it a better long-term investment for those willing to accept a smaller payout today in exchange for greater potential. For investors seeking long-term growth, Alphabet is the clear winner.