Investing can make you rich. You don't even have to beat the market.

Simply trusting your spare cash to an index fund with entirely average long-term returns is more than enough to double your money in 10 years. If you also reinvest dividend in more shares along the way, a fund mirroring the S&P 500 (^GSPC 0.88%) index can boost your gains to 10.6% a year. That's a total return of 174% per decade, on average. Keep that up for a while, and add more cash over time, and you'll eventually have a pretty nice nest egg.

A handful of specific stocks can do the same thing, but that's a tricky idea. No matter how well-run or well-planned a business might be, there is no such thing as a risk-free stock. Building sustainable wealth requires many years and even decades of success. Wall Street is littered with the remains of once-great companies and stocks that had a moment in the sun but couldn't stick around in the long run.

So I can't recommend betting your life savings on warehouse retailer Costco Wholesale (COST 0.48%), but this stock could be a solid cornerstone in a diversified portfolio.

Costco's business mojo

As of January 2025, you won't find another discount store or grocery chain that can match Costco's return on assets (ROA). This company can do more with a dollar's worth of funds and equipment than any retailer in its class.

The company also boasts world class return on equity (ROE), which makes it a great steward of shareholder investments, too.

Its gross profit margin isn't great, but Costco still collects generous bottom-line earnings. You see, the profit margin on goods sold in its stores is famously slim. Most of the earnings spring from the warehouse club membership program.

Costco's recipe for success

Some discount retailers make up for their low in-store prices by pinching every possible penny in the supply chain. Minimum-wage paychecks are common, along with minimal employee benefit programs. Store brands are rarely great in this sub-sector, since low prices often take priority over product quality.

Costco is different.

The company is famous for paying a living wage with solid health plans and other uncommon benefits. The Kirkland store brand often compares favorably to leading brands in each category, and Costco may have sourced their stuff from the same factories.

As a result, Costco's workers tend to be happy there. That's one way to guarantee better service and fewer employee relations missteps. The focus on quality over price also results in satisfied customers, and there is less pressure on the procurement department to build a cheap supply chain.

And the membership program more than makes up for Costco's modest margins at the top of the income statement. Costco reported $7.4 billion of net income in fiscal year 2024. At the same time, the company collected $4.8 billion of membership fees from its 76.2 million households. That's a nearly costless revenue stream, accounting for about 65% of Costco's total earnings.

Image source: Getty Images.

Is Costco's stock worth a splurge?

Now, Costco's stock isn't as affordable as its Kirkland hot dogs. The stock price has seen a compound average growth rate (CAGR) of 27% over the last five years, breezing past Walmart's (WMT 1.24%) 20.6% CAGR and even Amazon's (AMZN 2.11%) 18.7% yearly return. Pick your favorite valuation ratio and chances are high that Costco's stock looks more expensive than Walmart or Amazon through that lens.

In other words, Costco's business quality is no secret. Investors are paying a premium for this stock. The company has arguably earned this luxury the hard way, but you still have to be comfortable with lofty valuations before buying the stock today.

Great company, tricky timing

Costco is a great company and a worthy addition to any long-term investment portfolio. However, this may not be the best time ever to pick up Costco shares. It's alright if you already have an automated Costco investment set up, since you're taking an active part in the market.

But if you don't, I would suggest looking elsewhere for stocks that can set you up for life. Costco may find its way back to that discussion someday, either through years of stellar results or a quick price correction. It just isn't on that list for me right now.