Battle of Dividends: Apple, Inc. vs Microsoft

Even tech stocks can sometimes be solid dividend stocks for income investors. And two of the best dividend stocks in the tech sector are undoubtedly Apple (AAPL -0.57%) and Microsoft (MSFT -1.84%). But which of these two dividend-paying tech juggernauts is the better bet for investors looking for income?

Comparing these two dividend stocks is particularly timely, given that Apple stock has soared about 21% in the past three months while Microsoft has lagged with a 2.4% gain during the same period. After Apple's recent rise in its stock price, is Microsoft looking more attractive?

MSFT data by YCharts

Microsoft

Data source: Reuters. Table by author.

Microsoft is a well-rounded dividend stock. With a dividend yield of 2.4%, the software giant easily beats Apple's 1.6% dividend yield. Going further, the yield is meaningfully higher than the 2% average dividend yield of stocks in the S&P 500.

However, to achieve this dividend yield, Microsoft needs to pay out a higher portion of its earnings than Apple does. In the trailing 12 months, Microsoft has paid out 69.5% of its earnings in dividends. Notably, however, Microsoft's dividend payments as a percentage of its free cash flow are just 42%. Paying out only 42% of its annual free cash flow in dividends, Microsoft's dividend is easily sustainable.

Another area where Microsoft shines as a dividend stock is in the company's underlying earnings growth. Microsoft has recently witnessed a strong return to earnings growth, with EPS up 6.6% in the company's most recent quarter. This earnings growth should help Microsoft maintain its 11.7% average annual dividend increase of the past three years.

Apple

Data source: Reuters. Table by author.

Apple's weaknesses as a dividend stock compared with Microsoft are immediately apparent. Its 1.6% dividend yield is well below Microsoft's and even below the average 2% dividend yield of stocks in the S&P 500. Further, Apple's earnings growth recently is paltry. In the company's most recent quarter, EPS rose just 2.3% year over year.

But Apple stands out when it comes to its payout ratio. With a payout ratio of just 27%, Apple has substantial room for further dividend increases in the future. And Apple's dividend payments as a percentage of its free cash flow are even lower, at just 23%.

Image source: Getty Images.

So while Apple's three-year average annualized dividend growth of 9% is lower than Microsoft's 11.7% average annualized growth during the same period, Apple's dividend looks as if it will probably grow faster in the coming years.

Overall, it seems that Apple's rising stock price recently has suppressed the company's dividend yield to a low enough level to make Microsoft look like the better dividend stock today -- a different conclusion from in my November 2015 comparison, when Apple's dividend yield was higher and its payout ratio was even lower. However, while Microsoft may be the better dividend stock today, Apple still looks like an attractive bet for income investors thanks to the growth potential evident from the company's very low payout ratio.