Many investors like buying blue chip stocks not just for their growth potential, but also steadily rising yields. Microsoft Corporation (NASDAQ:MSFT) certainly falls in that category. MSFT stock has offered both explosive upside and also a rapidly growing dividend in recent years.
But how does that dividend stand up to the competition within the tech sector? Investors have plenty of other options in mega-cap tech as well. Apple Inc. (NASDAQ:AAPL) is undoubtedly the most popular. But many investors have also flocked to International Business Machines Corp. (NYSE:IBM), Qualcomm, Inc. (NASDAQ:QCOM) and Intel Corporation (NASDAQ:INTC).
Does MSFT stock offer the best prospects for an income investor today … or is it one of its tech brethren?
When looking at current yield, Microsoft stock certainly doesn’t lead the pack. In fact, given the strong run in Microsoft’s shares recently, its current yield has fallen back to just above 2%. The breakdown:
- QCOM: 4.4%
- IBM: 4.3%
- INTC: 3.1%
- MSFT: 2.2%
- AAPL: 1.6%
Of course, there is more to income investing than just picking the highest current yield. It’s no secret that IBM has struggled to find business momentum lately; the company has suffered 21 consecutive quarters of revenue decline. Intel is busy fighting off a challenge from Advanced Micro Devices, Inc. (NASDAQ:AMD). Qualcomm is bogged down in a different sort of fight, stuck in courtroom drama with Apple.
Microsoft, by contrast, can justify its relatively low yield with its stronger current prospects.
Its Windows and Office businesses remain cash cows, with little sign of viable competition on the horizon. And Microsoft’s Azure cloud business continues to mount impressive gains against chief rival Amazon.com, Inc. (NASDAQ:AMZN). An investor in MSFT stock has good visibility into the future of the company’s earnings growth.
That, in turn, leads to more secure prospects for dividend growth.
Can Microsoft’s Dividend Grow Quickly?
Over the past five and 10 years, Microsoft has grown its dividend by compounded annual rates of 15.2% and 15.7%. That’s tremendous. An investor that bought MSFT stock 10 years ago is now looking at a 9% dividend yield on their cost basis.
That’s a good lesson about how current yield doesn’t always tell you everything you need to know.
But how does Microsoft stack up with its peers? Intel has increased its dividend at a mere single-digit rate in recent years. IBM has matched Microsoft’s growth rate, but at the cost of a higher payout ratio that means its rapid growth likely can’t continue. Similarly, Qualcomm has poured cash out to investors recently, but earnings don’t support sizable hikes at this juncture.
Apple doesn’t have the track record to really examine its historical dividend growth rates, but so far, so good. AAPL has juiced its payout by 66% since starting regular dividends in 2012. Going forward, it seems probable that Apple can grow its dividend more quickly than Microsoft, at least in the short run. Apple pays out a mere 26% of its profits as dividends, and it’s a free-cash-flow generator.
Apple also has a massive war chest stored overseas, just waiting for President Donald Trump to offer up a repatriation tax holiday. That said, Microsoft also has a sizable fiscal reserve that will benefit from the coming tax law change. But that said, if that cash is freed up, that’s more likely to be spent on M&A, buybacks or a special one-time dividend.
Even without a holiday, of these five tech stalwarts, Microsoft and Apple seem most likely to please income investors going forward.
Microsoft’s Future Outlook In Focus
I recently detailed Microsoft’s forward prospect. So, for today, let’s drill in on its future as a dividend-paying equity.
MSFT stock currently pays out $1.56 per share in dividends annually. And traditionally, Microsoft increases its dividend in September, so we should expect another increase shortly.
Let’s say the dividend goes up to $1.68 per share, in line with last year’s increase. Analyst consensus shows $3.62 in forward earnings for MSFT. Thus, the new dividend payout would account for a little under half of Microsoft’s earnings. Over the next five years, analysts project a 10.1% compounded earnings growth rate for Microsoft.
If management raises the dividend at that same 10.1% rate, maintaining a steady payout ratio, Microsoft stock would then yield $2.52 per share in 2022 … representing a 3.5% dividend yield on today’s $73 stock price, which would be your cost basis if you bought in today.
Not bad at all for a resurgent blue-chip like Microsoft.
Can It Deliver?
Yield investors often fall into a particularly dangerous snare; that is, projecting past results out into the future.
Many folks would look at Microsoft’s 15% compounded dividend growth rate of the past, and assume similar optimism into the future. However, this is unlikely to happen. With size, it becomes harder to keep expanding at the same rate. That’s why I assumed 10.1% growth, based on Microsoft’s projected earnings growth.
The issue with modeling MSFT is that there are two main — and quite different — businesses here. The first is the legacy PC software business, which will continue to put up huge profits but won’t expand much. Dividend growth won’t come from here. The cloud segment, on the other hand, has huge upside. However, it’s too early to tell where profit margins will settle in this space. Amazon and other large competitors won’t cede the territory easily.
That said, Microsoft seemingly has the financial clout to beat Amazon in a pricing war, should it come down to that.
Verdict on MSFT Stock
I’d say that based on what we know today, Microsoft probably is the safest of these five companies for a dividend investor. Sure, the likes of IBM stock and QCOM stock offer much higher dividend yields at present. However, they are facing huge and persistent business headwinds. You have to have some faith in their management teams to be able to reverse their present slides.
Microsoft needs no such turnaround; its last earnings report shows that all is going along well there.
On the flipside, Apple could potentially overtake Microsoft as a better dividend payer in future years. However, it’s unclear what Apple’s next must-have product will be. And the iPhone’s reign won’t last forever. I have more confidence in Microsoft’s ability to keep growing profits five or more years out from today.
At the time of this writing, the author owned INTC, QCOM, and IBM stock. He had no position in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.