As expected, software giant Microsoft (NASDAQ:MSFT) announced a dividend increase this week. The 9.5% increase in its quarterly payout extends a dividend history that dates back to 2003. 

While Microsoft's fairly low dividend yield means the stock might often get overlooked as a dividend stock, another meaningful annual dividend increase in the books makes the stock a bit more enticing as an investment for generating income. Here's a close look at the dividend boost.

Visitor's center at Microsoft's headquarters

Image source: Microsoft.

A 9.5% increase

In line with the company's practice of announcing a dividend increase on the third Tuesday of every September, management declared the 9.5% dividend hike after market close on Tuesday, Sept. 18.

The new quarterly dividend, which is payable on Dec. 13 to shareholders of record on Nov. 15, comes out to $0.46 per share, or $1.84 per year. This is up from a previous dividend of $0.42 per share, or $1.68 per year.

The 9.5% increase is ahead of its 7.7% and 8.3% dividend increases in fiscal 2018 and fiscal 2017, respectively. The accelerated growth rate reflects management's confidence in its business and Microsoft's strong performance recently, including an 18% year-over-year increase in trailing-12-month non-GAAP earnings per share for the fiscal year ending June 30.

"We delivered more than $110 billion in revenue for the full year with double-digit top line and bottom line growth," Microsoft CEO Satya Nadella said about the fiscal year in the company's fourth-quarter earnings call. "And our commercial cloud business surpassed more than $23 billion in revenue for the year, with gross margin expanding to 57%."

Could the increase have been higher?

Combining Microsoft's thriving business with changes in tax law that enabled Microsoft to repatriate overseas tax at a lower tax rate, a higher-than-usual dividend increase was a no-brainer. However, Microsoft's strong momentum had some investors thinking management would increase its dividend at a higher rate. Indeed, one analyst predicted the dividend could get hiked by more than 20%. Nevertheless, the 9.5% increase is above the company's five-year average annual increase of 8.5%. 

Thanks to this dividend increase, Microsoft now has a forward dividend yield (planned per-share dividend payments over the next 12 months as a percentage of a company's stock price) of 1.6%, up from a previous dividend yield of about 1.5%. Though this dividend yield is below the average dividend yield of stocks in the S&P 500 of 1.8%, it's a solid payout when considering that Microsoft is only paying out about 40% of its free cash flow in dividends. This wiggle room for its dividend, combined with Microsoft's strong earnings momentum, positions the company to grow its dividend at rates like this for years to come.

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