Microsoft (MSFT) is making waves for its $2.5 billion purchase of game company Minecraft, but the real news for Microsoft dividend investors is that its time for this blue-chip dividend stock to hike its payouts again.
Like clockwork, once a year, Microsoft announces an increase to the dividend on MSFT stock this week in September.
Time was, no one held tech stocks for the dividends — but times change. And don’t laugh at the less-than-spectacular yield from the Microsoft dividend. Even with a five-year average of just 2.5% — which is decent, but hardly a whopper — the Microsoft dividend has become a critical piece of this blue-chip stock’s total return.
As a member of the S&P 500 and Nasdaq-100 (not to mention the Dow Jones Industrial Average), it’s almost impossible to construct a portfolio without Microsoft. That’s why anything it does to support the price on MSFT stock and return cash to shareholders is good news for everyone.
So what can we expect?
The last three times MSFT lifted the dividend on Microsoft stock, it did so by anywhere from 3 to 5 cents. Let’s assume the next hike to the Microsoft dividend is in the middle of that pack, or 4 cents a share. That will bring the payout up to 32 cents a quarter or $1.28 a year, making the dividend yield 2.8% at current prices.
As we mentioned, no one is going to be blown away by a 2.8% yield on a dividend stock, but that doesn’t mean it isn’t driving lots of extra upside when you look at the big picture of total return.
Microsoft Dividend Drives Total Return
After more than a decade of being dead money, Microsoft stock is finally starting to pull its weight again on a price basis, and the dividend is making for some outsized total return.
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Indeed, since the bear-market bottom of 2009, MSFT is up 205% vs. a 162% gain for the S&P 500. Add in the dividend, and the total return on Microsoft comes to 250%. That’s another 45 percentage points of upside that investors might not realize they got from the “underwhelming” Microsoft dividend.
Heck, over the last 52 weeks, the Microsoft dividend has added nearly 5 percentage points of upside to MSFT stock. And if you go all the way back to 2003 when Microsoft first shocked tech investors by instituting a dividend, the payouts have added about 80 percentage points to investors’ total returns.
Just have a look at the Microsoft chart above.
Bottom Line
Like it or not, if you’re an index investor or a properly diversified active one, you own Microsoft stock. It’s too large to avoid. Everyone has an interest in how much higher the Microsoft dividend goes this week.
Here’s hoping for a big raise.
As of this writing, Dan Burrows did not directly own any of the aforementioned securities.
