Years go, many technology companies would not even consider paying dividends. But times have changed, and now investors are clamoring for income wherever they can get it due to historically low interest rates. Intel and Microsoft both have payouts that beat the average yield of the S&P 500 by wide margins. Which stock is the better pick depends on what type of investor you are.
Here is a breakdown of which company may be right for you.
Better for income now: Intel
If you are asking which stock is the better choice for investors who need income now, such as retirees or those with shorter investment time horizons, Intel beats out Microsoft. The current dividend yield measures up at 3.2% compared to 2.8% for Microsoft. That difference of about 50 basis points, while it does not seem like much at first glance, will net you almost 15% more income if investing with Intel.
The primary reason Intel pays a higher yield is that it distributes a greater percentage of its cash flow. The free cash flow payout ratio is a valuable tool for analyzing how much cash a company spends on dividends. The free cash flow payout ratio is a better gauge than the traditional earnings per share payout ratio, since cash dividends come from free cash flow and not earnings. Last year, Intel distributed 42% of its free cash flow in dividends, and its free cash flow payout ratio elevated to 47% during the first quarter.
At Microsoft, its free cash flow payout ratio for the most recent fiscal year was a more modest 33%. Through the first three quarters of the current fiscal year, the payout ratio is still a manageable 40%. Although Intel shareholders receive more income at the moment, the higher payout could also inhibit its ability to grow its dividend going forward.
Better stock for future income: Microsoft
While Intel edges out Microsoft in terms of current yield, it is clear which stock will provide more income down the road. Microsoft has grown its dividend at double-digit rates over the past several years with few signs of slowing down. In fact, Microsoft has increased its dividend by an impressive 19% compounded annually over the past five years.
In comparison, the five-year dividend CAGR at Intel clocks in at just 8%. This calculation may actually make Intel's dividend growth look better than it really is, because after a few years of aggressive raises, payout increases have ground to a halt. Intel increased its dividend by 6% this year, which is below its five-year average, and prior to that raise, Intel had gone more than two full years without raising its dividend.
Another reason to think Microsoft can outpace Intel in dividend growth going forward is that Microsoft has a stellar balance sheet it can leverage if necessary. At the end of last quarter, Microsoft held $95 billion in cash and marketable investments on its balance sheet with just $27 billion in long-term debt. In fact, Microsoft is one of only three U.S.-based companies to hold a triple-A credit rating from Standard & Poor's. By contrast, Intel has $14 billion in cash and short-term investments on the books with $12 billion in long-term debt.
As a result, while those investors who need more income right now should side with Intel, those with anything longer investing horizons should pick Microsoft for its stronger track record. It should not be long before Microsoft surpasses Intel with consistent payout increases.
Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple. 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.