Last week, Microsoft (NASDAQ:MSFT) investors were treated to another dividend increase. This time the company raised its per-share payout from $0.28 to $0.31 per quarter -- good for a 10.7% increase. Oddly enough, the reaction among investors was somewhat muted -- mostly because investors had widely priced in a dividend increase.
Still, the company currently yields nearly 2.7%, more than the 10-year Treasury. And while many investors question investing in a technology for an income play, here are three reasons why Microsoft is a top dividend stock.
A solid history of dividend increases
There's a reason why Microsoft investors didn't appear to be surprised about Microsoft's dividend hike. In both timing and substance, this appears to be par for the course with Microsoft's dividend. Matter of fact, since November 2010 Microsoft has increased its dividend every November -- going from a per quarter payout of $0.13 to $0.31 during the period. If anything, the 10.7% increase was actually a little small considering the annualized growth rate during that period is 24.3%.
Obviously, it would be hard for the company to continue its rather large increases as the per-share payout becomes larger. But if history is any indication, Microsoft is looking to continue to raise its dividend and further enrich investors.
Both its cash pile and free cash are enough to pay the dividend ... with one caveat
Generally, a company has two sources of cash for dividends, the company's cash pile and cash from operations. Microsoft has nearly $85 billion in cash in the bank and only paid $9 billion in common dividends last year. So the company easily has the cash to pay the dividend. However, Microsoft has most of its cash abroad and would have to pay a 35% penalty on any repatriated funds.
The company is producing enough cash-free cash flow to continue to pay the dividend. Over the last three years Microsoft has averaged a free-cash-flow payout ratio of 28.4%.
Microsoft, like other companies, has found a loophole of sorts to return cash, sidestep repatriation taxes, and take advantage of low interest rates: debt. Last year, the company raised nearly $8 billion in debt to add to its U.S. cash pile, taking advantage of its AAA credit rating.
Don't forget its buyback program
Lost in the discussion of Microsoft's dividend is its share buyback program. That's unfortunate, because its buyback program has been impressive in its own right. Microsoft has returned nearly $73 billion to investors in the last five years: $40 billion in share buybacks and $32.5 billion in common dividends. The chart below gives you some context:
As the chart shows, Microsoft reduced their shares outstanding by over half a billion shares -- or nearly 6%. That's great for dividend investors on two accounts. First, the company doesn't have to pay as much to sustain or to increase its dividend per share due to fewer shares outstanding. The second is its effect on earnings; by reducing the share count, Microsoft can grow earnings per share without actually increasing its bottom line, and if the company does increase net income, investors are entitled to a larger portion of its profits.
Microsoft investors appear to be taking the company for granted. The market considered its recent double-digit dividend increase lacking and the company actually traded down on the day of the announcement. However, for income-oriented investors looking for sustainable, increasing dividends, Microsoft is a company that should be on your radar.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.