Microsoft (MSFT +1.08%) isn't a stock that dividend investors would normally select based on its yield. After all, at less than 1%, it's a below-average payout. Most investors target it for its growth prospects as it isn't all that exciting as an income-generating investment at the moment. But given its strong financials and its consistently increasing payouts in recent years, Microsoft could make for a viable dividend stock in the long run.
The company raised its dividend recently, and more rate hikes could be coming. Here's a look at how much annual dividend income Microsoft stock could generate for you in the future.
Microsoft's dividend hikes exceeding 10% annually on average over the past 10 years
On Sept. 19, Microsoft announced it would be increasing its quarterly per-share dividend to $0.75, a 10% increase from its most recent payment of $0.68 a share. This bump-up would apply to the first quarterly payment of fiscal 2024. It's a relatively high rate of increase, but it's not uncommon for the tech company. Here's a look at Microsoft's annual dividend hike percentages over the past 10 years.
Image source: Company filings. Chart by author.
Since fiscal 2014, when it was paying $0.28 per share per quarter, the dividend has increased by 168%, averaging a compound annual growth rate of 10.4% during that stretch. If the company continues to raise its payout at that rate, it will take approximately seven years for Microsoft's dividend to double.
How much dividend income could you earn on a $10,000 investment in Microsoft?
At its current dividend payment of $0.75 per share per quarter, or $3 per share for the full year, Microsoft's stock now yields around 0.95%. That's far below the S&P 500 average of 1.6%. But for a business that is in the process of acquiring gaming company Activision Blizzard and that has invested billions in ChatGPT-maker OpenAI, there's a flurry of growth potential for Microsoft in the long haul. This hugely profitable business is sure to get bigger. And as profits grow, its likelihood of making more rate increases also rises.
NASDAQ: MSFT
Key Data Points
If you were to invest $10,000 into the stock right now, you could expect to collect about $95 in annual dividends based on the current yield. But what if the company were to increase its dividend at a rate of 10.4%, as it has recently averaged? Or what if it scales back its dividend hikes to a rate of around 7.7%, which was the lowest rate hike it has made in the past decade? Here's a look at how your annual dividend income might appear under both scenarios over the next 20 years.
Chart by author.
A decade from now, your dividend income will likely double, regardless of whether Microsoft raises at its average rate or the low end. And in 20 years, if it's still growing the dividend at more than 10% per year, you could be collecting $682 in annual dividends. That would be nearly 7% of your original $10,000 investment coming back to you in the form of dividends.
Inflation will chip away the real dollars you earn, but the conclusion remains: You can earn significantly more dividend income from Microsoft by buying and holding the stock for not just years but decades. Plus, there are also potential profits to be earned from the stock's rising valuation.
Should you buy Microsoft's stock?
Microsoft is trading at a multiple of 33 times its trailing profits. While that is higher than the S&P 500 average of 20, it's arguably a justifiable premium, given how much growth potential may be on the horizon for the company. Artificial intelligence (AI) is still in its early stages, and already Microsoft is in a great position to benefit from offering AI-powered products and services.
Microsoft is one of the best stocks for dividend and growth investors to hold in their portfolios for the long haul.
