Battle of Dividends: Apple vs Microsoft

In a head-to-head comparison earlier this year, Apple (AAPL -1.22%) came out ahead of Microsoft (MSFT -1.27%) as a better dividend stock. But since that comparison in March, shares of Apple have significantly outperformed Microsoft. Could Apple's steep gain in stock price alter the outcome of a face-off between these two dividend-paying stocks today?

Even more, while Apple's 21% return since that March 16 analysis of the two stocks is significant, Microsoft's 13% gain during this same time frame is impressive, too. This raises the question: Are either of these companies' dividends still attractive?

Let's take a look at both of these stocks to find out which is the better bet (if either is at all) for investors looking for income. The answer may surprise you.

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Microsoft

Data source: Reuters. EPS = earnings per share. YOY = year over year.

Neither Microsoft nor Apple boast dividend yields in line with the average of stocks in the S&P 500. On average, stocks in the popular market index boast a dividend yield of 1.8%. Microsoft, at least, comes somewhat close to this average, with a dividend yield of 1.6% -- not impressive, but notable. 

Fortunately, Microsoft has other things going for it that make up for a lukewarm dividend yield. First of all, the company is paying out less than half of its earnings in dividends, as indicated by its 43% payout ratio. By combining this conservative payout ratio with Microsoft's strong momentum in its underlying business (27% trailing-12-month earnings growth), investors can see what makes the software giant attractive as a dividend stock: Microsoft can easily afford its dividend, making a good case for its long-term sustainability.

In addition, Microsoft's low payout ratio and strong fundamentals position the dividend for meaningful growth over the long haul. Last year, Microsoft increased its dividend by 7.6% -- and there's no reason growth like this can't continue on an annual basis for years to come.

Overall, Microsoft remains a compelling dividend stock. But how does this compare with Apple?

Apple

Data source: Reuters. EPS = earnings per share. YOY = year over year.

Microsoft has Apple beat when it comes to dividend yield. The iPhone maker's dividend yield is just 1.4%. But Apple's payout ratio of only 23% shows that the tech giant's dividend is extremely conservative. Apple, therefore, has plenty of room for increases in the coming years, even if earnings growth slows.

Speaking of earnings growth, that's another area in which Apple is outperforming Microsoft. The tech giant's trailing-12-month earnings per share (EPS) has risen 31% year over year. This compares with 27% growth for Microsoft's EPS during the same time frame.

Of course, Microsoft's earnings are generally viewed as more sustainable and less subject to product-cycle volatility than Apple's. This is because Microsoft derives a significant portion of its revenue from commercial cloud services and other annuity-like revenue streams, while over half of Apple's revenue comes from a single product: the iPhone.

This view that Microsoft's earnings are more sustainable than Apple's translates to a win for Apple when it comes to valuation. Microsoft trades at 27 times earnings and Apple's price-to-earnings ratio is just 19.

Overall, Apple continues to look like the better dividend stock, with its extremely low payout ratio, cheap valuation, and strong business performance. Of course, its dividend yield -- at just 1.4% -- isn't impressive. But investors should expect Apple's dividend to grow nicely in the coming years.

While Apple is the more compelling dividend stock, both of these market leaders remain good long-term bets for investors looking for income.