Dividend investors seeking attractive income stocks to buy may be inclined to start with sectors such as utilities, healthcare, or real estate investment trusts (REITs), while reserving the technology industry for those with a growth-oriented focus. However, tech stocks can also be great dividend-paying companies. Take Microsoft (MSFT 1.25%): though the company's brand may not evoke the word "dividend" in the minds of most investors, Microsoft is a terrific income stock nonetheless. Read on to find out why.
Microsoft's rock-solid underlying business
A longtime leader in the technology industry, Microsoft achieved superior returns over the long term -- and a market capitalization exceeding $3 trillion -- thanks to its innovative capabilities and consistent financial results. The company's leadership across several industries, from computer operating systems to cloud computing and artificial intelligence (AI), helped spur strong growth in recent periods. In the third quarter of its fiscal year 2025, ending on March 31, Microsoft's revenue of $70.1 billion and net income of $25.8 billion grew by 13% and 18% year over year, respectively.
Microsoft's cloud-computing unit, Azure, was once again one of the top performers. Azure's revenue soared by 33% compared to the year-ago period.
Image source: Getty Images.
Microsoft has been gaining ground on its longtime competitor in the cloud-computing industry, Amazon. The two should continue to battle it out for a long time, since there is still substantial whitespace in cloud and AI. Microsoft's CEO Satya Nadella, recently said: "Cloud and AI are the essential inputs for every business to expand output, reduce costs, and accelerate growth."
That should translate into rising demand over the long run, especially since it's arguably still in the early innings of both industries, as Amazon CEO Andy Jassy has said. Microsoft's competitive edge, which it derives from its strong brand name and switching costs, should also play a role in helping the company perform well over the long run. However, its most important asset might be its internal culture of innovation.
Microsoft has capitalized on significant technological advancements over the past few decades and benefited from them. AI and cloud computing are just the latest. In 10 years, there might be some other new tech trend sweeping through Wall Street. There's no guarantee Microsoft will always lead whatever new market arises, but the company's innovative abilities and substantial pile of cash -- it generated $69.4 billion in free cash flow over the trailing-12-month period -- should enable it to find enough successful growth avenues to continue generating consistent revenue and earnings over the long run.
Microsoft's fundamentals are rock solid. The company holds the highest credit rating possible, surpassing even that of the U.S. government. For all these reasons, Microsoft appears to be a safe, long-term investment even before considering the dividend.
Plenty of room for dividend hikes
Income-seeking investors will appreciate Microsoft's strong operations. Consistent payouts mean little unless the company backing them can sustain them and perhaps even afford regular dividend increases. Microsoft can do that, and it has done so in recent years. Over the past decade, the company's dividend has increased by 167.7%. Yet, there is plenty more room for the company to grow it as evidenced by its modest 29.4% cash payout ratio.
Some might even argue that Microsoft's payout ratio is too conservative. Perhaps the company could afford more aggressive dividend hikes without significantly impacting the cash it plans to reinvest in the business to spur growth. Whether or not that's the case, one thing seems clear: Microsoft has plenty of room to increase its dividends some more. So, investors shouldn't dwell too much on its 0.7% forward yield, which is even lower than the S&P 500's modest 1.3% average.
A strong dividend, multiple growth avenues, and solid operations -- are there any reasons not to buy Microsoft's shares? Some might point to valuation -- the stock trades at 33.4 times forward earnings. That's above the S&P 500's average of 22.3 and the information technology industry's 29.2. However, Microsoft deserves a premium given its leadership in two fast-growing markets. The company's forward price-to-earnings ratio is fair relative to its growth potential. Others might also worry that Microsoft will see business disruptions if economic troubles hit, perhaps as a result of Trump's trade policies.
That may be true, but Microsoft should be able to recover from those; it has lasted for decades and survived plenty of downturns before. Microsoft will encounter some challenges, but long-term investors should stay put. The stock can deliver superior returns from here on out just as it has in the past.
