Retirement investing is typically all about safety and security. After all, retirees can't afford to take overly risky bets on speculative investments that might blow an irreversible hole in their nest eggs. With that in mind, it might seem inappropriate to suggest a stock in a technology company for retirees. That's because technology is commonly viewed as a volatile industry in which high-flying companies soar and then can easily crash and burn if their innovation doesn't keep up with competitors.
But not all technology companies are created equal. For example, there are a few technology companies that share many of the same qualities as other sectors that retirees flock to. One such tech company is Microsoft (NASDAQ:MSFT). Here's why Microsoft is a high-quality dividend stock that retirees should consider.
Stability and dividends
Retirees often look to buy stock in large companies with rock-solid balance sheets. The stocks they favor often pay dividends as well, which are an important margin of safety for income investors. On these qualities, Microsoft definitely fits the bill. It's a megacap company, with a market capitalization in excess of $360 billion. Companies this large tend to have smoother, more predictable cash flows and stable profits. That helps insulate investors against sudden, dramatic crashes, which is a quality that retirees would surely appreciate.
Microsoft recently concluded its fiscal 2015 first quarter, and the company's results once again beat expectations. Microsoft posted excellent 25% revenue growth. That's because sales on both sides of its business, its software and hardware, are soaring. On the software side, the company continues to make huge progress in the cloud. Office 365 racked up 25% more subscribers just since the previous quarter. The Azure and Dynamics CRM offerings are also gaining traction and helped commercial cloud revenue soar 128% year over year.
On the hardware side, Microsoft's Xbox One, the newest iteration of its gaming console, continues to be a hit. Total Xbox sales doubled last quarter, and the Xbox One is now available in 28 geographic markets.
Microsoft generated $7 billion of free cash flow last quarter, according to S&P Capital IQ data. In addition, Microsoft holds a rock-solid balance sheet. At the end of the last quarter, Microsoft held $89 billion worth of cash and investments on its balance sheet. In such an advantageous position, Microsoft can afford to do a lot of different things with its prodigious cash flows.
Microsoft uses a significant portion of its free cash flow to pay dividends to shareholders. It offers a nifty 2.8% dividend yield, which beats the broader market's overall yield, as measured by the S&P 500 Index. In addition, because Microsoft generates solid growth and has so much cash on the books, the company can afford to raise its dividend on a regular basis. Microsoft increased its dividend by 11% in September. Over the past five years, the company has raised its dividend by 19% compounded annually. This level of dividend increase not only beats inflation, but it also results in significant income generation over time.
Microsoft is ideal for retirees
On the surface, many retirees might be reluctant to invest in a technology company, because of the volatility associated with the industry. But while memories of the 1999 technology bubble might still haunt investors, it's a new day for technology companies like Microsoft. That's because Microsoft is now a megacap company with stable operations. The company is reliably profitable and generates billions of free cash flow every quarter.
That means Microsoft can do what retirees in search of income value want most from their investments, which is to pay strong dividends. Microsoft pays a market-beating dividend and also increases its dividend regularly. Doing so allows its investors to receive solid income, and their purchasing power is protected as well, since Microsoft's dividend increases are well above the rate of inflation.
For all these reasons, retirees looking for a strong dividend stock to buy should consider Microsoft.
Bob Ciura 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 don't 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.