While many investors turn to tech stocks for growth, leading tech companies can be great dividend stocks, too. For one, the leaders are very good at generating free cash flow, a necessary ingredient in paying out dividends. Microsoft (NASDAQ:MSFT) generated $33.64 billion in free cash flow over the last year, and has increased its dividend by 252% over the last decade.

Microsoft is dominant in several software niches with its Windows operating system and its Office productivity suite, and it's finding big success in the cloud market, but there are better choices for investors looking for a combination of growth and rising income from dividends. Here's why Apple (NASDAQ:AAPL) and top video game maker Activision Blizzard (NASDAQ:ATVI) are better dividend stocks.

A roll of 100-dollar bills sitting next to a label displaying the word "dividends."


More to offer

Currently, Apple's dividend yield of 1.48% is slightly higher than Microsoft's 1.41%. However, Apple beats Microsoft in three other crucial metrics: the payout ratio, dividend growth, and valuation.

Over the last year, Microsoft paid out 40% of its free cash flow as dividends, but Apple paid out only 24%. The payout ratio is just as important as comparing yields because it indicates how much room a company has to increase its dividend by merely raising the percentage of free cash flow that it pays out. Apple stock offers nearly the same dividend yield, but the iPhone maker has more room to increase its payout, which could lead to Apple raising its dividend faster than Microsoft.

Apple has increased its dividend payout faster than Microsoft over the last 10-year and 3-year periods. Since it paid its first dividend in 2012, Apple's dividend payout has risen by 671%, and the dividend has climbed by 37% in the previous three years. Meanwhile, Microsoft has increased its dividend by 132% over the last 10 years and 27% over the last three years, while both companies have increased the dividend by the same rate over the previous five years.

Finally, Apple has a lower valuation than Microsoft. Apple trades at a forward P/E ratio of 17.5 compared to Microsoft's 27.2 times this year's earnings estimates. Sales of iPhone have curtailed Apple's top-line growth lately, but double-digit growth in services, such as Apple Pay, Apple Music, and subscriptions via Apple TV, helped soften the shortfall.

Apple is doubling down on services with its upcoming Apple TV+ service launching this fall, as well as other subscription services for Apple News and Apple Arcade. Analysts expect Apple to grow earnings 13% annually over the next five years, compared to Microsoft's 14%, which makes Apple's lower forward P/E look even more attractive.

A gaming giant

Activision Blizzard is a better dividend stock, too, but for different reasons than Apple.

Activision's dividend yield of 0.79% is smaller than Microsoft's 1.41%. However, like Apple, Activision has a much lower payout ratio and has increased its dividend faster than Microsoft.

Activision paid its first dividend in 2010 and has increased its payout every year. Over the last year, Activision dished out only 16% of its free cash flow in dividend payments, and over the last five years, the game maker's dividend climbed by 85%, better than Microsoft's dividend increase of 65% over that same period.

Activision stock currently trades for a forward P/E of 21.9 times expected earnings. Analysts currently have low expectations for future growth because of recent weakness in player engagement in some franchises. Plus, the company terminated its involvement with Bungie -- the maker of Destiny -- which was one of eight franchises that generated $1 billion in revenue for Activision Blizzard.

The absence of Destiny and soft engagement trends will negatively impact Activision's growth this year, but the company should be back on track next year, because management has some big initiatives in the works, including reimagining its biggest franchises for the fast-growing mobile market.

In the short term, management is focused on increasing the rate of content drops for its popular franchises, which should revitalize player engagement and get the company back to growth mode in 2020. Additionally, Activision Blizzard continues to see huge momentum with its top esports event Overwatch League, with Coca-Cola and Anheuser-Busch InBev recently signing up as sponsors.

Investors looking for the best of both worlds -- growth and income -- should give Apple and Activision Blizzard a close look before investing in Microsoft.