When investing in dividend stocks, Apple (AAPL 2.42%) and Microsoft (MSFT 2.20%) are two prominent names that often come up for consideration. Both companies have a long history of generating significant returns for their shareholders. Even more, each company has been able to pay a steadily growing dividend to investors over the last decade while also delivering market-beating returns in their share prices. But which tech giant's shares are the more attractive bet for investors looking for a reliable stream of growing income?
To decide whether Apple or Microsoft is a better dividend stock, let's compare the two companies on three key factors dividend investors should consider when buying a stock for its income stream: dividend history, payout ratio, and valuation.
Dividend history
Though both Apple and Microsoft boast impressive dividend history, Microsoft has Apple beat on this front. The company has paid a dividend every year since 2003 and has rewarded investors with annual increases to its dividend for 11 consecutive years. Apple has similarly delivered 11 years of consecutive increases, but its current streak of dividend payments only started in 2012.
Microsoft is also notably growing its dividend at a faster rate than Apple. The company's most recent increase was 10% per share. This put the quarterly dividend at $0.68, or $2.72 annually. As of this writing, this dividend payout gives Microsoft a dividend yield of about 0.8%. Apple's last dividend increase came in at 4.3%. The current payout puts Apple's dividend yield at 0.5%.
Payout ratio
The battle between Microsoft and Apple as dividend stocks heats up when you consider the two companies' payout ratios, or the percentage of their earnings they are currently paying out in dividends.
Apple's payout ratio is extremely low, at just 16%. This suggests the company has huge room to continue growing its dividend over time -- even if earnings fail to grow or even contract. Microsoft's payout ratio is still low, albeit not as low as Apple's. The software specialist's payout ratio is 28%, leaving plenty of breathing room for the quarterly cash payout.
Valuation
Coming in with the tiebreaker is Apple's more conservative valuation. The stock trades at 33 times earnings, while Microsoft trades at about 38 times earnings. While analysts do notably expect more rapid earnings growth from Microsoft over the next five years than Apple, Microsoft's valuation is high enough that it seems to be pricing in all of the company's expected long-term growth. On the other hand, Apple's more conservative valuation leaves a little more room for the tech company to potentially surprise to the upside regarding earnings growth over the next five to 10 years.
With all this said, Microsoft may be the better bet for investors prioritizing dividend yield today. Of course, both companies have quite low dividend yields. So, if a substantial dividend yield is a priority, investors may want to consider different ideas altogether. But for the patient investor who does need a large stream of cash today but still wants to own a solid long-term dividend stock, Apple is a decent idea.
