Microsoft vs Apple: Which Is the Better Dividend Stock?

Some investors looking to bolster their portfolio with dividend stocks might overlook Microsoft (MSFT 2.22%) and Apple (AAPL 5.98%) due to their low dividend yields. This is arguably a big mistake.

Though both companies pay investors low dividends compared to the average yield of stocks in the S&P 500, the two stocks make up in other areas for what they lack in yield. For the dividend investor specifically, both stocks' payouts have outstanding long-term growth prospects.

This means that investors who own these stocks will likely see their payments increase significantly over the next five to 10 years, likely with increases every year.

But which of these two stocks is the better pick for dividend investors? To find out, let's compare them in several key areas, including business growth, dividend yield, and payout ratio.

Growth

Both Apple and Microsoft's top-line growth rates have been rattled by an uncertain macroeconomic environment. But both companies have seen revenue trends make progress toward more-normalized levels in recent quarters.

Microsoft's revenue in its most recent quarter, for instance, rose 8% year over year. That was an improvement from 7% growth in the period ended three months earlier and 2% growth in the quarter ended on Dec. 31, 2022.

Apple's revenue growth actually turned to a decline in the first quarter of fiscal 2023, with sales falling 5% year over year. But this year-over-year decline has improved to almost breakeven in the company's most recent quarter, when revenue fell only 1% and earnings growth turned positive. 

Though Apple's top-line growth trends are expected to improve in fiscal 2024 and beyond, analysts expect Microsoft's growth to generally continue outpacing Apple's. This is particularly evident in analysts' forecast for Microsoft's earnings per share to grow at an average rate of 14.4% annually over the next five years versus a consensus for Apple's earnings to rise just 6.4% per year over this same period. 

While investors can't count on analysts' forecasts to be accurate, the wide difference in the expectations for these two companies, combined with Microsoft's recent outperformance when it comes to growth, is enough to give Microsoft the win here.

Dividend yield

Microsoft's dividend yield of 0.8% is well below the average yield of stocks in the S&P 500 of 1.6%, but it easily beats Apple's. The iPhone maker's yield is just 0.5%.

Of course, dividend investors likely aren't considering these stocks for their paltry yields today but rather for their potential yields in the future, on today's cost basis. Both companies should have substantially higher dividend payouts five to 10 years from now.

Consider that Microsoft's quarterly dividend payout has increased from $0.23 in 2013 to $0.68 today. Apple's has risen from a split-adjusted $0.11 to $0.24 over this same period. Though it's impossible to know how rapidly the two companies' dividends will grow over the next 10 years, they'll likely at least double -- and if Microsoft grows its business faster than Apple's, its payout could grow even faster.

Microsoft wins on dividend yield, with both a better yield today and higher expected growth for its payments over the next five to 10 years.

Payout ratio

One important area where Apple wins fair and square is payout ratio, or the percentage of earnings that the company distributes in dividends. All else equal, a lower payout ratio means that there's more room for dividend growth and that the dividend payout is safer (unlikely to be reduced, paused, or eliminated).

Apple's payout ratio of just 16% is extremely low. This is likely because the company has preferred to spend far more of its capital-return program on stock buybacks. Though Microsoft also buys back its stock, the company has recently been opting to spend more on its dividend than on repurchases. The company's incrementally stronger preference for a dividend compared to Apple management's means that Microsoft has a higher payout ratio of 27%. Though that's still a healthy figure.

Apple wins when it comes to payout ratio, but Microsoft is the overall winner as a dividend stock. Sure, investors will have to pay a higher valuation to get access to Microsoft's dividend and its growth momentum; the company trades at 34 times earnings versus Apple's price-to-earnings multiple of 31. But this is a fair price to pay for a meaningfully better dividend.