Microsoft continues to demonstrate its commitment to long-term investors through a robust mix of dividends and stock buybacks, positioning itself as an attractive choice in the competitive landscape of the “Magnificent Seven” stocks, which also includes Nvidia, Apple, Alphabet, Amazon, Meta Platforms, and Tesla. These companies are recognized for their remarkable performance and potential for future growth.
Impressively, Microsoft currently leads the S&P 500 in the total amount spent on dividends, surpassing other heavyweights such as Apple and JPMorgan Chase, as well as notable high-yield stocks like ExxonMobil, Chevron, Johnson & Johnson, and Verizon Communications. In its recent fiscal year ending June 30, Microsoft reported expenditures of $18.42 billion on stock buybacks and $24.08 billion on dividends. Furthermore, the company announced a 10% increase in dividends in September, marking its 16th consecutive year of annual raises.
Although Microsoft’s current dividend yield stands at 0.7%, it remains an exceptional choice for investors seeking dividend-paying growth stocks. A common pitfall among dividend investors is an overemphasis on forward dividend yields, which only provide a snapshot of potential returns. This measure can be misleading, as it fails to account for a company’s long-term ability to grow dividends, which is more crucial for sustained passive income.
Corporations that routinely expand their earnings can justify higher dividend payouts, leading to appreciating stock prices. Microsoft, ranked as the fourth most valuable company globally, has consistently yielded substantial returns for long-term investors while also establishing a significant passive income stream. For instance, an investor who purchased Microsoft shares a decade ago at roughly $56 per share would enjoy a yield on cost of 6.5%, calculated by taking the annualized dividend and dividing it by the original purchase price.
The forward dividend yield, while helpful, often penalizes high-performing stocks like Microsoft, which has increased its dividends by over 250% in the past ten years. As the stock price has risen significantly, the yield percentage has inevitably decreased, overshadowing the company’s dedication to returning capital to shareholders.
Additionally, Microsoft is focused on stock buybacks, which have substantially outpaced stock-based compensation. These buybacks effectively reduce the number of outstanding shares, which enhances earnings per share and improves the stock’s overall value for investors in the long run.
As of the latest update, Microsoft’s stock price sits at $485.06, with a market capitalization of $3.6 trillion and a gross margin of approximately 68.76%. This financial stability, combined with a strategic focus on diversity across its operations—including a flourishing cloud computing segment through Microsoft Azure and investments in artificial intelligence via partnerships with companies like OpenAI—positions Microsoft as a balanced choice among the Magnificent Seven in the tech sector.
As tech companies ramp up spending on AI, Microsoft is carefully navigating this space, ensuring that its operational cash flow remains robust. The company’s capital expenditures (capex) may have surged, but so has its operational cash, allowing for growth in free cash flow—a critical indicator of financial health.
Microsoft’s commitment to shareholder returns through growing dividends and its diversified business strategy solidifies its place as a foundational stock for investors. Even with a current yield of only 0.7%, future yield on cost projections promise to be significantly higher as Microsoft continues its pattern of dividend increases and robust capital allocation. This adaptability makes it an appealing stock to consider, even amid potential market fluctuations in the coming years.
