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Why Investors Should Love Microsoft's Dividend

By Daniel Sparks – Sep 17, 2020 at 9:03AM

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The software giant's earnings momentum and low payout ratio should easily support sustained dividend growth.

The pandemic has put a big dent in many companies' growth plans. Even more, industries that were hit particularly hard by travel restrictions and stay-at-home orders have seen many dividend cuts in recent months. But Microsoft (MSFT -1.89%) is flexing its financial muscles during the pandemic, announcing a near-10% increase to its dividend.

Here's a closer look at the dividend boost -- and what it means for investors.

A bar chart with a line highlighting a growth trend

Image source: Getty Images.

Microsoft's 9.8% dividend increase

On Tuesday, Microsoft's board of directors announced a $0.05 hike to its quarterly dividend, a 9.8% increase compared to the previous quarter.

While this dividend increase is higher than the company's average three-year annualized dividend growth rate of 9.2%, it's slightly below last year's 10.9% dividend raise. Notably, both last year's and this year's dividend increases were $0.05 per share.

"The dividend is payable Dec. 10, 2020, to shareholders of record on Nov. 19, 2020," said Microsoft in a press release about the dividend increase. "The ex-dividend date will be Nov. 18, 2020." 

Sustainable dividend growth

It's not surprising to see Microsoft boosting its dividend. In its recently concluded fiscal year 2020, both revenue and earnings per share increased by 14% year over year.

What's more, Microsoft's powerful cloud segment, which the tech company refers to as "intelligent cloud," saw even faster revenue growth than the overall business. Compared to the prior-year period, intelligent cloud revenue grew 17% (19% in constant currency) in fiscal Q4, to $13.4 billion, accounting for more than 35% of total revenue. An aggressive driver of the segment was Azure, Microsoft's cloud-computing offering, which enjoyed a 47% revenue jump year over year (50% in constant currency).

Microsoft's low payout ratio bodes well for the dividend's sustainability. The tech giant is currently paying out only about 35% of its annual earnings in dividends. This leaves significant leeway if the company runs into unexpected challenges.

This revenue and earnings momentum, combined with Microsoft's conservative payout ratio, suggests that there's plenty of room for substantial dividend growth over the next decade.

Of course, buyers of Microsoft stock today don't get an exciting dividend yield. Microsoft's just-announced $0.56 quarterly dividend amounts to $2.24 annually, or about 1.1% of the company's share price. But even though the dividend yield may be low today, meaningful dividend growth for years to come is likely.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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