Best Dividend Stock to Buy Right Now: Costco vs. Realty Income

On the surface, retailer Costco Wholesale (NASDAQ: COST) and real estate investment trust (REIT) Realty Income (NYSE: O) 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 Realty Income relatively cheap. A lot of investors, particularly those in search of yield, will probably find Realty Income more interesting.

But is that the right move to make? Let's see.

Costco does a lot of things right

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

That's important because it allows Costco to focus more on customer service. That includes ensuring a great buying experience, thanks to happy employees, and low prices, since membership fees allow the company to accept slimmer 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 is not cheap -- the price-to-earnings ratio is a heady 53, which is also near all-time highs.

Although Costco has a long history of rewarding investors with annual dividend increases (20 consecutive years and counting), the stock is clearly being offered at a premium price. In fact, the yield, at roughly 0.5%, is near the lowest levels in the company's history. Most dividend investors should probably put Costco on the wishlist and not the buy list.

COST data by YCharts.

Realty Income is a high-yield retail landlord

Realty Income's dividend yield is a far more enticing 5.2%. Although the yield has been higher in the past, it is toward the high end of the yield range over the past decade and above the 10-year average yield of 4.5%. Although Realty Income's stock has been on the rise of late, it is still an attractive option for those in search of yield. Note that the dividend has been increased annually for nearly three decades.

O Dividend Yield data by YCharts.

But the interesting thing about Realty Income in comparison to Costco is that 73% of its rent roll comes from single-tenant retail assets. Retail concepts go in and out of favor, but prime retail locations tend to remain attractive for decades. Realty Income owns a lot of well-located properties within its over 15,400-asset property portfolio. It is, indirectly, a way to generate income from retailers -- just with less specific retail concept risk, since the REIT can just release a space that experiences a vacancy.

The only problem here is that Realty Income is a slow and steady tortoise compared to a company like Costco. For example, over the past decade, Costco's dividend has risen over 220%, compared to just a 40% or so rise for Realty Income. However, if you are in search of current income right now, Realty Income's dramatically higher yield will probably win your favor.

COST Dividend Per Share (Quarterly) data by YCharts.

When you add in the valuation factor, with Costco's price being a bit lofty and Realty Income's more attractive, there's even more reason to consider the real estate investment trust today.

You need income and you need income growth

Costco is expensive right now, and most investors should probably be sitting on the sidelines. Realty Income is more attractively priced, and it offers a far more generous yield. But don't ignore Costco, or similarly strong dividend growth stocks.

It is a good idea to create a foundation of high-yield stocks, like Realty Income, that you supplement with a few faster-growing dividend offerings. Costco could, if there were a deep enough drawdown, be just such an offering. For now, though, the best option of this pair is still high-yield Realty Income.

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 .