We recently compiled a list of the 7 Best Stocks to Invest in for Medium Term. In this article, we will look at where Costco Wholesale Corporation (NASDAQ:COST) ranks among the best stocks to invest in for the medium term.
On September 18, the Federal Reserve reduced its policy rate by 50 basis points, lowering it to 4.75%–5.00% from 5.25%–5.50%. Following the announcement, stocks surged, with the broader market hitting a new intra-day all-time high and closing at its 39th record of 2024, marking the first since mid-July. The index has risen over 20% since the beginning of the year. The interest rate reduction has created new opportunities for investors, signaling a shift towards a more supportive monetary policy intended to boost economic activity. Lower interest rates generally result in reduced borrowing costs, encouraging both business expansion and consumer spending. This fosters a favorable environment, making medium-term investments, typically ranging from 3 to 5 years, more appealing.
To effectively execute this strategy, investors should evaluate several key factors in the companies they select. These include the stock’s performance over the past year, profitability, sales figures, debt levels, price-to-earnings ratio, and dividends. Additionally, assessing revenue growth and payout ratios can provide further insights.
Dividend stocks are often seen as good choices for medium-term investments, providing investors with passive income while they hold the stock. In addition, dividend-paying companies can be a smart investment during times of market volatility. A report by Hartford Funds showed that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The report also highlighted that in decades with total returns below 10%—such as the 1940s, 1960s, and 1970s—dividends made a significant impact on overall returns.
Dividend growth is the most favored approach within dividend investing, as it boosts investors’ income over time. Kirsten Cabacungan, an investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank, emphasized the significance of dividend growth strategies in investment planning. Here are some comments from the analyst:
“Generally, it’s larger, more mature companies that return capital to their shareholders in the form of dividends. Companies that have consistently increased their dividends tend to be more stable, higher quality businesses, which historically have weathered downturns and are more likely to have the ability to pay dividends consistently.”
A company’s dividend payout ratio is a crucial measure of its ability to maintain dividend flexibility. Firms that allocate most or all of their earnings to dividends may struggle under competitive pressure, as their cash flow might not be enough to sustain operations. A report by Nuveen highlighted that, historically, stocks with the highest payout ratios haven’t delivered the best long-term results. Instead, companies with moderate to moderately high payout ratios have tended to outperform over the past two decades among dividend-paying stocks. With this, we will now discuss some of the best stocks to buy for medium term.
Our Methodology:
For this list, we used a Finviz screener to to find dividend stocks with an average revenue growth of over 10% over the past five years, highlighting companies with consistent sales growth. From that selection, stocks with a five-year average payout ratio of under 40% were chosen, indicating a strong cash position. The final list includes 7 companies with the highest number of hedge fund investors, based on Insider Monkey’s Q2 2024 database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 71
5-Year Average Annual Revenue Growth Rate: 11.34%
5-Year Average Payout Ratio: 27.6%
Costco Wholesale Corporation (NASDAQ:COST) is an American retail company that offers a wide range of products for its consumers. The company has always been profitable, with the stock returning nearly 215% in the past five years, outperforming the broader market, which returned nearly 91% during this period. The company has continually adjusted to evolving trends, which has drawn the attention of investors. It has successfully capitalized on the increasing move towards online shopping. The retailer anticipates that its vast range of competitively priced products will continue to attract customers, whether they shop online or in its physical stores. It is among the best stocks to buy for medium term.
Costco Wholesale Corporation (NASDAQ:COST) recently reported a 7.1% rise in monthly net sales, reaching $19.83 billion in August, up from $18.51 billion during the same period last year. This strong performance aligns with its ongoing solid fundamentals. Operating in a sector that is resilient to economic downturns, the company continues to grow steadily. In 2024, it plans to open 28 new stores worldwide, mostly in the US. As it expands its presence, both membership and revenue are expected to increase, contributing to sustained long-term sales and earnings growth.
Costco Wholesale Corporation (NASDAQ:COST) is also a strong dividend payer with 20 consecutive years of dividend growth under its belt. Its future dividend payouts are safe because of its low 5-year average payout ratio of 28%. Its quarterly dividend sits at $1.16 per share and has a dividend yield of 0.52%, as of September 19.
The number of hedge funds tracked by Insider Monkey owning stakes in Costco Wholesale Corporation (NASDAQ:COST) jumped to 71 in Q2 2024, from 65 in the previous quarter. The total value of these stakes is nearly $6 billion.
Overall, COST ranks 6th on our list of the best stocks to invest in for medium term. While we acknowledge the potential of COST as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than COST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.