Microsoft (NASDAQ:MSFT) recently announced that it's raising its quarterly dividend payment by one penny per share -- from $0.09 to $0.10. While that increase may not sound like much, it's actually incredibly important.

First, on a percentage basis, the move represents an 11.1% leap. And since Microsoft's last dividend hike happened just three quarters ago, the penny boost means 15% annualized growth. Impressive. Even better, it's Microsoft's second dividend hike since the company began paying regular dividends in 2003.

With this move, Microsoft is cementing its reputation as an owner-friendly firm and giving shareholders a great opportunity to beat the market over the long run.

Strength in numbers
Dividends, however, are far more significant than the returns they provide. Among other things, dividends clearly say, "Look: We have the cash. We're earning the money we claim to be making."

If a company doesn't have the cash to make the payment, then it has to borrow it, which is both obvious and unsustainable. In a post-Enron world, that reality check alone is worth its weight in gold.

Predicting the future
Additionally, dividends can provide amazingly accurate insight into what a company's management really thinks will happen. Take, for instance, Bank of America (NYSE:BAC) and its dividend policy over the past few years. Compare its dividend growth rate with its earnings growth rate, and you'll see that the two track each other quite closely.

Fiscal Year

Earnings Per Share

Dividends Per Share



















*Compound annual growth rate. All data split-adjusted.

This direct correlation may not seem remarkable, except for one small fact: Bank of America traditionally changes its dividend in the middle of its fiscal year. This means that its dividend hikes have fairly accurately pre-estimated its earnings growth trend. That's a pretty powerful bit of financial prognostication, brought to you by a lowly "few pennies a share" dividend hike.

Protecting your pocketbook
Yet another reason why dividends rule is the simple fact that solid dividends may give you something you simply won't find anywhere else: inflation-protected income. Simply put, if you receive $1,000 in dividends this year, and the companies you own that generated those payments raise them 5% next year, then you'll receive $1,050. Best of all, to get that increase, you don't have to do anything. That's why dividend-paying companies are often the foundation of the world's richest fortunes.

Think it isn't possible to find companies that will regularly raise their payments for you? Here's a handful that have done just that, for at least a decade. You've probably heard of at least one or two of them.


1995 Dividends

2005 Dividends


General Electric (NYSE:GE)




Eli Lilly (NYSE:LLY)








Target (NYSE:TGT)




Wal-Mart (NYSE:WMT)




*Compound annual growth rate. All data split-adjusted.

The eye of the beholder
A penny raise here and a penny raise there may not seem like much on the surface. But if you build your portfolio around financially strong, dividend-producing companies, you'll eventually end up with some serious cash. It's with that philosophy that my Foolish colleague Mathew Emmert runs Motley Fool Income Investor.

Mathew and the rest of the Income Investor team know that you can make serious money over time by finding, buying, and owning companies that will pay you for decades. You won't get rich quick off your dividends, but you can certainly use them to feather a very comfortable nest. Join us at Income Investor today to learn how you can get started appreciating the beauty of the lowly penny. Your 30-day free trial starts here.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft, General Electric, and Bank of America. Microsoft and Wal-Mart are Inside Value selections. Bank of America and Eli Lilly are Income Investor picks. The Fool has a disclosure policy.