Don’t let Microsoft (MSFT) stock’s recent poor performance fool you. Despite shares of the software giant falling about 29% last year and even about 5% year to date, the underlying business remains impressive. Investors, therefore, may want to consider scooping up some shares of this stock amid this pullback.
The tech stock is especially attractive for investors looking for dividend income that could grow in the years ahead. Overall, Microsoft is a solid and reliable dividend stock that has the potential to provide investors with a steady stream of income and potential for capital appreciation.
Here are three reasons why investors may want to consider adding this dividend stock to their portfolios today.
Impressive financial strength
One key factor dividend investors consider is a company’s financial strength. After all, it’s a company’s underlying earnings that enable a company to pay a dividend. More importantly, earnings growth over time leads to dividend growth.
Capturing Microsoft’s financial strength, the company posted double-digit top- and bottom-line growth in its most recent quarter. Revenue increased 11% year over year to $50.1 billion and net income rose 14% to $17.6 billion.
Even more, Microsoft CEO Satya Nadella shared comments in the company’s most recent earnings release implying he is bullish on the company even during an uncertain macroeconomic environment. “In a world facing increasing headwinds, digital technology is the ultimate tailwind,” he explained. The company’s products and services help customers “do more with less,” he said.
Analysts seem to have a similarly optimistic outlook, with the consensus forecast calling for earnings per share to grow at an average rate of 13% over the next five years.
Strong dividend growth
With robust momentum in its underlying business, it’s not surprising that the company has delivered strong dividend growth to shareholders. Last September, Microsoft announced a 10% increase to its dividend payout. Even more, this was the company’s 20th consecutive year of providing investors with dividend hikes.
The new quarterly dividend payment comes out to $0.68, up from $0.62 previously. This means Microsoft currently pays out $2.72 annually per share to investors, giving the stock a dividend yield of 1.1% as of this writing.
A low payout ratio
Finally, investors should note that Microsoft sports an impressively low payout ratio, or its annual dividend payments as a percentage of annual earnings. The company’s payout ratio sits at under 27% today. This leaves significant room for dividend growth in the years to come. In addition, a low payout ratio means the risk of the dividend payment ever being suspended is low.
Overall, Microsoft’s earnings moment, strong dividend growth, and low payout ratio combine to make Microsoft a very attractive stock. Topping it all off, the stock currently trades at a compelling valuation, with a price-to-earnings ratio of under 25 — low for a market leader generating consistent revenue and earnings from a diversified set of products and services, many of which are mission-critical for its customers.
— Daniel Sparks
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Source: The Motley Fool