"Magnificent Seven" stocks -- Nvidia, Apple, Alphabet, Microsoft (MSFT 0.49%), Amazon, Meta Platforms, and Tesla -- are known for their market-beating returns in recent years and runways for future growth.
So you may be surprised to learn that Microsoft pays more dividends (in terms of total cash spent) than any other S&P 500 company -- even more than Apple, JPMorgan Chase, and high-yield behemoths like ExxonMobil, Chevron, Johnson & Johnson, and Verizon Communications.
In fiscal 2025, which ended on June 30, Microsoft spent $18.42 billion on stock buybacks and $24.08 billion on dividends. In September, Microsoft announced a 10% dividend raise, marking its 16th consecutive annual increase.
Despite only yielding 0.7%, here's why Microsoft is an excellent dividend-paying growth stock for long-term investors to buy now.
Image source: Getty Images.
Microsoft is an underrated dividend stock
One of the biggest mistakes dividend investors make is overly focusing on a stock's forward dividend yield, which is the return you can expect to make from the stock's annualized dividend, divided by its current stock price. Forward dividend yield is useful, but limited. It's merely a snapshot of a dividend yield at a moment in time. It doesn't accurately reflect a stock's true passive income potential, which is more closely tied to the dividend growth rate.
The best dividend-paying growth stocks are companies that consistently growth their earnings, and in turn, can justify paying a higher dividend expense. And if investors are confident that earnings can continue rising, the stock price should go up over time. There's even an elite group of companies known as Dividend Kings that have raised their payouts annually for over 50 consecutive years -- like Coca-Cola.
Microsoft is the fourth most valuable company in the world and has produced monster gains for long-term investors. But it has also become a passive income powerhouse.
If you had bought Microsoft 10 years ago for around $56 per share, your yield on cost would be 6.5%. Yield on cost takes the annualized dividend and divides it by the price you paid for the stock, rather than its current price, which better represents the dividend income generated based on your initial investment.
The issue with forward dividend yield is that it punishes high-performing stocks and rewards underperforming stocks. Many of the highest-yielding companies in the S&P 500 are stocks that have gone down in price in recent years, rather than companies that are rapidly raising their dividends.
By comparison, Microsoft has increased its dividend by over 250% over the last decade, but the stock price has gone up even more, so the yield has dropped -- overshadowing Microsoft's commitment to its dividend.
What's more, Microsoft also buys back a ton of stock -- far more than it pays in stock-based compensation. Like dividends, stock buybacks are a lever companies can pull to return capital directly to shareholders. If buybacks are larger than stock-based compensation, the outstanding share count will fall. And with fewer shares to go around, earnings per share will rise faster than net income, making the stock a better value for long-term investors.
NASDAQ: MSFT
Key Data Points
Microsoft's spending is bold, but controlled
Microsoft is the most balanced Magnificent Seven stock to buy for 2026 because it rewards shareholders through a combination of organic growth, dividends, and buybacks. The company has a booming cloud computing business through Microsoft Azure; is a major player in artificial intelligence (AI) through OpenAI (which powers a lot of Microsoft's AI tools); has a massive software, gaming, and personal computing presence; and owns a variety of platforms -- from GitHub to LinkedIn.
But no single segment makes or breaks the investment thesis. Rather, Microsoft has numerous high-margin ways to deploy capital, which can reduce the temptation to bet too heavily on a single idea.
Big tech companies have been in the spotlight for their AI spending, with concerns that the payoff of that spending is uncertain or won't be realized for several years. Microsoft is spending heavily on AI, but not to the point where it's straining free cash flow (FCF).
FCF is a crucial metric for determining the amount of cash flowing in or out of the business. The formula is simply cash flow from operations minus capital expenditures (capex). As you can see in the chart, Microsoft's capex has exploded higher in recent years, but so has its cash from operations. So it is still growing FCF.
Data by YCharts.
However, some companies, like Meta Platforms, are growing capex faster than cash flow from operations, which is leading to lower FCF. Meta still has a phenomenal balance sheet and high margins, but the aggressive spending adds more pressure for investments to pay off.
A foundational stock to buy now
Microsoft's high dividend growth rate and commitment to returning capital to shareholders should allow it to maintain its position as the S&P 500 component with the largest dividend expense for years to come. Investors who buy the stock today will only get a 0.7% yield based on its current price, but they can expect the yield on cost to be much higher in the future as Microsoft raises its payout.
Microsoft's growing dividend, reasonable valuation, and high-margin diversified business make it one of the most balanced stocks to buy and hold, even if there's a stock market sell-off in 2026.
