Recession fears sent the Nasdaq Composite tumbling into a bear market this year. But while the index itself is down 35%, certain dividend-paying constituents have fallen less sharply. For instance, Microsoft (MSFT -1.46%) and Costco Wholesale (COST 0.00%) have seen their share prices drop 30% and 24%, respectively.

That illustrates something many passive income investors already know. Businesses that pay dividends -- especially those that consistently raise their dividends -- tend to outperform the broader market. The reason for that is simple. Any business that generates enough cash to regularly increase its payout is often backed by strong fundamentals.

Microsoft and Costco are great examples. Over the last three years, the S&P 500 and the Nasdaq Composite have climbed 19% and 17%, respectively, but shares of Microsoft and Costco have soared 52% and 57%, respectively. That pattern of outperformance holds over the last five and 10 years as well, and investors have good reason to believe it will continue. Here's why.

Microsoft: A giant in software and cloud computing

Microsoft is the best global software seller in 2022, according to software research firm G2. That award is based on high user satisfaction and a strong presence across several verticals. Indeed, Microsoft 365 is the most popular enterprise application suite of any type, and it includes industry-leading solutions for office productivity, communications, and business intelligence. Microsoft has also been recognized as a leader in several cybersecurity verticals.

Meanwhile, Microsoft Azure holds a 22% market share in cloud infrastructure services, second only to Amazon Web Services. That success stems from its support for hybrid computing, and its robust suite of developer tools, cutting-edge database solutions, and industry-leading machine learning applications. That puts Microsoft in a good spot as cloud computing spending is expected to grow at 16% annually to reach $1.6 trillion by 2030.

Despite the difficult economic backdrop, Microsoft reported reasonably solid financial results over the past year. Revenue increased 15% to $203 billion and free cash flow rose 5% to $63 billion. Better yet, growth could easily accelerate when economic conditions improve, and shareholders have good reason to expect market-beating returns over the long run.

As discussed, Microsoft is a leader in office productivity, communications, and cybersecurity software, and it is the second-largest cloud services provider. Those markets will only expand as enterprises continue to lean into digital transformation. But Microsoft has also become the sixth-largest digital advertiser in the world, and its exclusive partnership with Netflix -- Microsoft provides the ad tech that powers Netflix's new ad-supported tier -- positions the company to gain market share in online video advertising, a market expected to grow at 14% annually to $362 billion by 2027.

Collectively, that should pave the way to solid share price appreciation. But Microsoft also pays a quarterly dividend of $0.68 per share, and that figure has grown 11% annually over the last decade. Given Microsoft's robust portfolio of business-critical software and cloud services, passive income investors can assume those regular dividend hikes will continue. That's why this growth stock is worth buying.

Costco: A retail titan with a powerful business model

Costco is the third-largest retailer in the world. That success is built on a membership-based business model and a simple idea; offer low prices on a limited number of brands across a broad range of goods, and that should drive high sales and rapid inventory turnover.

To that end, Costco carefully evaluates products based on price and quality, and it selects only 4,000 stock-keeping units (SKUs) for its shelves, far less than the 30,000 SKUs at most supermarkets. That supercharges its already-immense buying power by forcing brands to compete for limited shelf space.

Additionally, in cases where name-brand products have become too expensive, Costco will make similar products through its Kirkland Signature private label. That allows the company to undercut competitor pricing, which translates into cost savings for members (usually about 20%), while still earning a higher profit margin.

Many retailers have struggled over the past year as consumers have pulled back on discretionary spending in response to high inflation, but Costco delivered relatively solid financial results. Revenue increased 14% to $231 billion and earnings jumped 14% to $13.23 per diluted share. Better yet, Costco is well positioned to create value for shareholders in the coming years.

In the most recent quarter, the company reported a membership renewal rate of 92.5%, which demonstrates the value it creates for shoppers. Moreover, management has outlined a solid growth strategy centered on adding new members, scaling its e-commerce business, and opening new warehouses.

Additionally, Costco currently pays a quarterly dividend of $0.90 per share, and that payout has increased at 13% annually over the last 18 years. Given its tremendous scale and strong business model, shareholders can expect that dividend to continue rising in the years ahead. That's why this dividend stock is worth buying.