A growing stream of dividend income plus full exposure to the internet economy is a combination that's hard to pass up but difficult to come by. Yet right now, that's Microsoft's (NASDAQ:MSFT) sweet spot.
As a rule, if you’re on the hunt to add a stock to your portfolio that will bring steadily increasing income, look for companies that have the financial stability to continually pay dividends while also supporting an attractive yield. This would mean the company has to run a solid business capable of weathering the inevitable stock market cycles.
When evaluated by those metrics, software and hardware giant Microsoft ticks all the boxes. Here's why we think Microsoft is one of the premier technology stocks for income investors.
Despite many considering Microsoft to be simply a legacy tech company that built its business around its Office software and Windows operating system, the company’s wide economic moat remains intact. And it's the companies that are able to successfully defend their turf from competition that are also the ones able to deliver uninterrupted dividends.
Microsoft remains the leader in the desktop and laptop operating system market with a commanding 88% market share. Office, which has been transformed into a subscription service for companies that use it, continues to be a powerful driver of earnings. In the last fiscal year, these two units drove 52% of Microsoft's total sales.
To its credit, even as Microsoft remains successful at protecting Windows and Office—its cash cows—the company has also succeeded at grabbing a major share of additional, new-growth areas within the internet economy. Microsoft’s server and cloud computing division generated $20 billion a year in sales in the latest quarter. Only Amazon (NASDAQ:AMZN) beats them in market share within this segment. As well, MIcrosoft's foray into social media with the acquisition of LinkedIn (NYSE:LNKD) in 2016, has delivered revenue grow of 37% in the most recent quarter.
Last month, in another strategic move, Microsoft acquired GitHub, a web based hosting service, for $7.5 billion. This gives them access to the army of developers who use GitHub’s code repository products on a daily basis. GitHub hosts 27 million software developers working on 80 million repositories of computer code.
Microsoft's earnings momentum remains impressive. In the latest quarter, revenue rose 16% to $26.8 billion, operating income jumped by 23%, and earnings per share vaulted higher by 36% to $0.95 a share, making it the best quarter for Microsoft in many years, confirming that CEO Satya Nadella’s turnaround strategy is working.
Beyond the company’s business strength, the other important factor that makes a stock a good candidate for an income portfolio is the company’s ability to sustain its dividend payouts. You don’t want to buy a stock that offers a juicy dividend yield, just to be hit by a payout cut down the road. Rather, you want to invest in a business that generates recurring cash flow quarter-after-quarter to support—and perhaps even grow—its payout.
Microsoft has an excellent track record on this score. Since 2004, when it first began paying a dividend, the company’s payout has swelled by 425%. Dividend growth has been supported by a low payout ratio and strong underlying businesses.
With an annual dividend yield of 1.7%, Microsoft pays a quarterly dividend of $0.42 per share. That yield may look meager to many investors, but don’t forget that Microsoft stock has had an excellent run during the past 12 months, gaining 45% and outperforming many big tech names, including Google (NASDAQ:NASDAQ:GOOGL), Facebook (NASDAQ:NASDAQ:FB) and Apple (NASDAQ:AAPL).
Microsoft is focusing on the areas of technology where it is relevant but where it also has opportunities to lead in the future. That includes cloud computing, artificial intelligence, and corporate software.The cloud computing market, for example, is expected to grow from $285 billion last year to $411 billion by 2020. That segment alone is big enough to drive the company’s revenue growth for the next three to four years, according to Microsoft executives.
If you're looking for long-term income via a solid dividend stock, we see Microsoft shares as a good fit for this approach to investing.The stock offers upside potential with income growth.
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