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Battle of Dividend Stocks: Microsoft vs. Apple

By Daniel Sparks - Mar 21, 2021 at 11:45AM

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These companies pay billions in cash to shareholders every year -- and those payouts keep increasing.

Arguably two of the greatest dividend stocks are from tech giants Microsoft (MSFT -0.08%) and Apple (AAPL -2.38%). Though they currently have low dividend yields, with Microsoft's at 1% and Apple's at 0.7%, investors looking for income shouldn't overlook these income-producing investments. Not only do both companies regularly increase their dividends, but their payouts are likely to grow substantially in the coming years.

But which of these two dividend payers is the better investment?

Let's take a look.

A roll of hundred dollar bills next to a sign that reads, dividends

Image source: Getty Images.

Microsoft

The coronavirus pandemic negatively affected many businesses, with some popular dividend-paying companies even reducing or suspending their quarterly dividends. Microsoft, however, didn't skip a beat.

The tech giant announced a 10% increase to its quarterly dividend last September, increasing the payout to $0.56 every quarter -- or $2.24 annually. It was the company's 16th consecutive annual dividend increase.

Of course, it wasn't surprising to see Microsoft keep up its long history of annual dividend increases. The company easily affords its dividends. Of its $45 billion of fiscal 2020 free cash flow (cash flow left over after both regular operating expenses and capital expenditures are accounted for), for instance, only $15 billion went to dividends. Similarly, the company's payout ratio, or the percent of net income it pays out in dividends, was just 34% in fiscal 2020.

With a low payout ratio and an average annual dividend increase growth rate of 9% over the past three years, investors should expect more strong growth from Microsoft's dividend in the years ahead.

Apple

Apple may have a lower dividend yield than Microsoft, but its payout ratio of just 22% is meaningfully more conservative. In other words, Apple's dividend has a lot more room to grow in the coming years.

Furthermore, the company's robust free cash flow of $73 billion in fiscal 2020 is significantly greater than Microsoft's -- and the gap between Apple's free cash flow and Microsoft's has widened over the trailing-12-month period. During this timeframe, Apple's free cash flow was $80.2 billion, compared to Microsoft's $50.4 billion.

Of course, Apple commands a higher value than Microsoft. The company's market capitalization is $2 trillion compared to Microsoft's $1.7 trillion. But based on this financial analysis, Apple looks like its worth this greater market capitalization. It's arguably the more promising and resilient dividend stock. However, its win may only by a narrow margin, if not even debatable. Both tech stocks look like worthy considerations for investors looking to buy stocks poised to produce meaningful income over the long haul.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.47 (-2.38%) $-3.35
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$253.88 (-0.08%) $0.20

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