Software giant Microsoft (NASDAQ:MSFT) increased its dividend this week, as expected. The increase marks the 14th year in a row Microsoft has increased its dividend, and it reflects the company's recent record free cash flow levels. 

Further, Tuesday's dividend increase makes an already enticing dividend stock even better. Here's a closer look at Microsoft's dividend increase and why it's a good reminder of how enticing the software company is as a dividend stock.

A roll of $100 bills next to a sign reading "DIVIDENDS."

Image source: Getty Images.

Microsoft's dividend increase

Microsoft increased its quarterly dividend by 7.6% compared to the previous quarter's dividend. The new dividend is payable on Dec. 14, 2017. But investors will need to own the stock before the ex-dividend date on Nov. 15 in order to get paid the dividend.

The 7.6% increase is about in line with Microsoft's increase last year when the company increased its dividend by 8%. 

A solid dividend stock

Microsoft's meaningful 7.6% dividend increase this week reinforces the stock's quality as an income investment. Not only can Microsoft easily afford the dividend, but Microsoft's growing free cash flow recently makes a case for more dividend growth ahead.

Microsoft's trailing-12-month free cash flow is $31.4 billion, up about 26% year over year, making a dividend increase both easy and a no-brainer. Of Microsoft's record $31.4 billion of free cash flow in the trailing 12 months -- Microsoft's fiscal 2017 -- the software company paid out just $11.8 billion of its free cash flow, or about 38%. This compares with Microsoft paying out 44% of its free cash flow in dividends during fiscal 2016, and 43% of its free cash flow during fiscal 2015. Paying out a smaller percentage of free cash flow recently makes a good case for sustained dividend growth in the coming years.

Microsoft also shines when it comes to its dividend yield. The company's 2.1% dividend yield is higher than the average 2% yield of stocks in the S&P 500.

Further, Microsoft stacks up nicely against some of tech's best dividend stocks: Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC).


Dividend Yield

Dividends Paid as a Percentage of TTM FCF*










*Trailing-12-month free cash flow. Data source: Morningstar. Table source: Author.

Apple, for instance, may pay out only 25% of its free cash flow in dividends, but Microsoft dividend investors get a much meatier dividend yield of 2.1%. Apple's dividend yield is just 1.6%.

Compared to Intel, Microsoft's 2.1% dividend yield is well below the chipmaker's yield of 3%, but Microsoft has more room for dividend increases. Microsoft is paying out just 38% of free cash flow in dividends, while Intel's dividend payments as a percentage of free cash flow are 43%.

Microsoft was already a good bet for income investors -- and the company's dividend increase this week reinforces why: Microsoft looks well positioned to pay out a meaningful, growing dividend for years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.