Adding to its long history of consistent dividend growth, software-giant Microsoft (MSFT 0.60%) announced another dividend increase this week. Starting in December, the tech-company's quarterly dividend will now amount to $0.75 -- up 10% from where it was previously. The double-digit rate increase to its payout is a testament to the company's strong business momentum and management's confidence in Microsoft's underlying cash flow.
While the company has paid dividends long enough to be on most dividend-investors' radar or even in their portfolios, its low dividend yield might mean it's sometimes overlooked. But this 10% hike is a strong reminder that some companies with low dividend yields are still worth considering for their long-term dividend growth prospects. Indeed, the business-software specialist's dividend will likely continue growing at robust rates for the foreseeable future.
For shareholders of record on Nov. 16, the new quarterly dividend will be paid on Dec. 14.
NASDAQ: MSFT
Key Data Points
Growth to date
Microsoft's latest dividend increase marks its 19th consecutive year of dividend hikes. The latest increase, which puts Microsoft's total annualized payout at $3, is impressively more than 3x higher than what it was paying to shareholders just 11 years ago.
Growth has been strong recently, too. Microsoft's annual dividend payments five years ago were just $1.84. Indeed, the tech stock's dividend payments have grown at an average rate of about 10.3% over the last five years.
This bolstered quarterly payment will add to an already attractive return for the stock this year. Microsoft shares have risen 37% year to date as investors have cheered the company's strategy to integrate artificial intelligence (AI) into its products and its robust earnings growth (earnings per share increased 20% year over year in the company's most recently reported quarter).
Additionally, Microsoft investors are attracted to the company's strong growth in cloud computing. Its Azure and other cloud services revenue increased 26% year over year during the same period.
Underlying business growth like this easily supports the company's latest dividend increase.
Growth to come
Looking ahead, there's good reason to expect plenty more dividend growth from Microsoft. While there are a number of factors pointing to a high likelihood of dividend growth for years to come, including the tech company's history of dividend growth, its healthy balance sheet, and its strong earnings momentum, the most straightforward reason to expect more growth is its low payout ratio.
Over the trailing-12-month period, Microsoft only paid out 27% of its earnings in dividends. This means it could continue growing its dividend even if earnings didn't grow.
However, analysts have big expectations for earnings. The consensus forecast currently calls for Microsoft's earnings per share to grow at an average annual rate of about 14% over the next five years. While investors should take analysts' forecasts with a grain of salt, such an upbeat outlook for the company's bottom line at least bolsters the case for more dividend growth ahead.
Unfortunately, Microsoft's new quarterly dividend only gives the company a dividend yield of 0.9%, based on where the stock is trading at the time of this writing. However, the stock's dividend growth potential helps make up for this low yield, making Microsoft a great investment idea for investors looking for a reliable and growing stream of dividend income.
