Don’t Underestimate Microsoft Stock’s Dividend Potential
In today’s stock market, income investors typically have to choose between two sets of stocks: those with a decent yield today but not much growth potential, and growth stocks that forgo their current dividends. But there might be a stock that captures the best of both worlds: Microsoft Corporation (NASDAQ:MSFT).
Right now, Microsoft stock is far from being the hottest name in the technology sector. But, in the past 12 months, it still climbed a solid 14%. And that’s on top of the four quarterly dividend payments collected by MSFT stock investors during this period.
Going forward, I believe Microsoft stock still has what it takes to be a solid income play.
MSFT Stock Is Backed By a Rock-Solid Business
For income investors, few things are better than a steadily growing stream of dividends. But, for a company to be able to provide that, it needs a solid business. And that’s exactly what Microsoft has.
The company is in the tech sector, which might not be the usual shopping ground for income investors. But, over the years, Microsoft has built something that is critical to generating recurring income: a huge ecosystem of users.
Many consider Microsoft to be a vendor of software services, which would be correct. However, I consider it to be the owner of a huge ecosystem. That ecosystem has given it tremendous monetizing opportunities.
You see, the success of Microsoft’s “Windows” operating system is perhaps the best example of a first-mover advantage. When personal computers (PCs) became a possibility, Bill Gates knew that manufacturers really need computer programs to sell to users.
Microsoft created the “MS DOS” operating system for International Business Machines Corp. (NYSE:IBM) in 1980. Five years later, Microsoft unveiled the first retail version of Windows, “Windows 1.0.” And the rest is history.
Although Microsoft’s first-mover advantage in the desktop operating system business was captured in the 1980s, it has continued to benefit the company till this day. The idea is that, since most programs are written for Windows, users are more likely to choose it over other operating systems. The more users that Windows gets, the more incentive that developers will have to write programs for it.
That positive cycle has been running for decades. Right now, Microsoft’s other products—including “Windows XP,” “Windows 7,” “Windows 8,” and “Windows 10″—occupy a whopping 88.7% of the desktop operating system market. (Source: “Desktop Operating System Market Share,” NetMarketShare, last accessed January 4, 2017.)
Today, Microsoft offers a wide range of services. For instance, its “Office” suite of productivity software is in use at four out of five Fortune 500 companies. Microsoft is also one of the biggest providers of cloud services, with revenue from “Microsoft Azure” having more than doubled year-over-year in the most recent quarter. (Source: “Earnings Release FY17 Q1,” Microsoft Corporation, October 20, 2016.)
MSFT Stock Is Returning Value to Investors
Software and services might not sound as substantial as hardware devices, but Microsoft’s business is solid. A lot of the company’s software and services revenue could be recurring, and it doesn’t have to follow the same product update cycle as hardware devices.
And even though Microsoft has to reinvest for the future—like what every other tech company has to do—it can still generously reward MSFT stock investors.
Microsoft started paying dividends in 2003. Since then, its quarterly payout has only been increasing. From its first quarterly dividend of $0.08 per share to today’s $0.39 per share, MSFT stock’s quarterly dividend has been growing at a compound annual growth rate of over 14%.
At today’s price, Microsoft stock has an annual dividend yield of 2.5%.
Here’s the bottom line: it’s not easy to predict the stock market’s next move but, as long as Microsoft’s ecosystem keeps running, the company should have no problem continuing to rewarding income investors.