Dividend Aristocrats, or S&P 500 members that increase their dividend for 25 consecutive years, typically make great long-term investments. A company must establish itself to get into the S&P 500 and be increasingly profitable to afford all those payout raises.
Technology conglomerate Microsoft (MSFT 0.34%) often gets overlooked by dividend investors, who lump it into the growth sector instead. However, here are three reasons Microsoft could be one of the market's great dividend payers.
1. A commitment to paying shareholders
Dividends are cash expenses that a company pays directly to shareholders; they can't be manipulated with accounting adjustments or supported with debt over the long term. Not only does it take a robust business model to afford a dividend that grows each year, but it also becomes a part of the company's culture.
Management teams of Dividend Aristocrats are well aware of the importance of dividend-growth streaks to shareholders. Investors want to see a commitment to the payout that can give them comfort when a company inevitably hits the occasional tough patch.
Microsoft is well on its way to establishing a record of commitment to its dividend; the company's raised its dividend for 20 years, only five away from Dividend Aristocrat status. The dividend yields just 1.15% at today's stock price, but don't let that keep you from appreciating the payout. It's grown by an average of 12% annually over the past decade, providing steady, inflation-beating growth.
2. As close to bulletproof as you get
Financial health is vital to supporting a dividend, and Microsoft is the Wall Street equivalent of Arnold Schwarzenegger in his prime. The company's balance sheet has enough net cash (total cash minus debt) to pay dividends for more than two years. Microsoft is one of two companies with a AAA credit rating from the major corporate rating agencies. Its debt is rated higher than the U.S. government (rated AA+), which can print money.
MSFT Cash and Short Term Investments (Quarterly) data by YCharts
But the business itself would have to utterly collapse before Microsoft even worries about touching its balance sheet. The dividend payout ratio is just 28% of cash flow, meaning that Microsoft would have to see its cash profits fall almost 80% from their highs. And it's never dipped 30%.
3. Stable, recurring revenue
Microsoft's consistent business performance is the secret sauce behind its decades of growth and shareholder returns. The company is a conglomerate with major business segments deeply embedded in critical areas of the economy. For example, its Windows software, the cornerstone of the company's early days, holds a 76% share of global desktop computer operating systems.
It launched Azure just over a decade ago, which has grown to become the world's second leading cloud platform at 21% of the global market. It's currently building on its Xbox gaming ecosystem, growing Game Pass to become a platform where users can game through hardware and the cloud. These business segments create recurring revenue through subscriptions and licenses, making them more resilient across different economic scenarios. Is a company going to stop using its Outlook email if the business is slow? I'd say most probably wouldn't.
You can't ever assume anything with 100% certainty in investing, but Microsoft's business is as resilient and reliable as you'll encounter on Wall Street. Sure, the dividend yield may not be impressive, but owning the stock over the coming years will let those steady double-digit raises eventually add up to a significant dividend investment. Microsoft has all the ingredients of a future Dividend Aristocrat and eventual Dividend King.
