The "Magnificent Seven" stocks aren't particularly known for being dividend payers. This group of companies includes the following tech leaders: Apple, Alphabet, Amazon, Meta Platforms, Microsoft (MSFT 1.82%), Nvidia, and Tesla. These corporations have generally produced excellent stock market returns. However, several of them don't even pay dividends. Of those that do, one stands out as the best income stock of the group. That company is Microsoft. Let's find out why.
Eliminating (most of) the competition
It's hard for a company to be a great dividend stock when it doesn't pay any. So, we can start by putting aside those members of the Magnificent Seven that haven't initiated payouts. That gets rid of Alphabet, Amazon, and Tesla. Next, we can put Meta Platforms out of the running, too. Though the Facebook parent company pays a dividend, it just started doing so this year. Only time will tell whether Meta Platforms will become an outstanding dividend stock. But for now, it hasn't proven itself in this arena yet.
That leaves us with three companies in the running. One of them, Nvidia, is the inferior dividend stock of the trio. Nvidia hasn't increased its payouts in more than five years. The company's forward yield of 0.02% could hardly be lower. Nvidia has plenty of qualities that make it an attractive stock, but its dividend program isn't impressive, at least not compared to our two finalists.
The final round: Microsoft vs. Apple
Microsoft and Apple have raised their payouts significantly over the past 10 years. However, Microsoft's track record is better than Apple's in this category.
MSFT Dividend data by YCharts.
That's the first point in Microsoft's favor, especially since its dividend per share is more than three times Apple's. Next, let's compare the companies' yields. Microsoft also wins in this head-to-head, although neither is particularly impressive. Apple's forward yield of 0.53% is lower than Microsoft's 0.74%. Let's now turn to these companies' cash payout ratios. Microsoft's 30.75% is higher than Apple's 14.11%.
Conventional wisdom might suggest that Apple is the winner in this battle. A lower cash payout ratio is usually considered better as it shows that a company has plenty of room to increase its dividends. However, it can also show that a corporation is failing to do so despite having the means. Neither Microsoft nor Apple is anywhere close to a cash payout ratio that would be problematic.
In this context, the higher of the two might indicate a greater willingness to reward shareholders with dividend increases. That's especially true since Microsoft generates less free cash flow than Apple. Yet, the former spends a greater share of its smaller free cash flow on dividends. No wonder, then, that some investors feel it's about time for Apple to raise its dividend. So, this third category also goes to Microsoft. It has the superior dividend profile.
But that means nothing if it will be unable to sustain its dividend program in the future. Is Microsoft's underlying business strong enough to keep payouts moving in the right direction? The answer is a resounding yes! Microsoft remains the undisputed leader in the market for computer operating systems. It is also one of the biggest players in gaming.
The tech giant has multiple growth areas to exploit, from cloud computing to generative artificial intelligence, thanks to its investment in ChatGPT creator OpenAI. Microsoft also boasts a solid competitive advantage from multiple sources. Its brand name stands as one of the most valuable worldwide, and it benefits from switching costs thanks to its productivity tools and cloud computing services.
Also worth noting: Microsoft is one of the few companies with a higher credit rating than the U.S. government. The company can clearly handle its obligations. Microsoft will continue producing excellent financial results for a long time while providing a solid dividend stream to its shareholders. The company is the top dividend stock among the Magnificent Seven.
