Microsoft Stock Provides Rock-Solid Dividends
I have said many times that Microsoft Corporation (NASDAQ:MSFT) stock could be a great fit for a dividend portfolio. But people today seem to be more interested in trading. After all, why invest in Microsoft stock when you could get a potential triple-digit return by swing trading the hottest names in the Internet sector?
But recently, Microsoft stock—which doesn’t sound nearly as exciting as the trending tickers in the Internet sector—proved its resilience.
The unexpected victory of President-Elect Donald Trump has sent many tech stocks falling. Since then, they have started to bounce back, but Microsoft is ahead in the game.
Shares of MSFT stock now trade higher than on election day, while Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), and Alphabet Inc (NASDAQ:GOOG) have yet to make a full recovery to their respective closing prices on November 8.
The idea is that despite being in the tech sector, Microsoft stock is backed by the company’s rock-solid business. Its products and services might not sound as exciting is its peers, but when uncertainty hits, Microsoft could be the last one standing.
You see, Microsoft built its presence by making the “Windows” operating system for personal computers. And its dominance has continued until today. In October 2016, Microsoft’s products (“Windows XP,” “Windows 7,” “Windows 8,” “Windows 8.1,” and “Windows 10”) had a whopping 89.8% share of the desktop operating system marketplace. No other company had more than a three-percent share of the market. (Source: “Desktop Operating System Market Share,” Net Applications, last accessed November 17, 2016.)
The key here is first-mover advantage. Microsoft managed to capture a large part of the early PC users. The more people using Windows, the more incentive developers had to write programs for it. And the more programs available, the more appealing Windows becomes.
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The positive cycle allowed Microsoft to grow from a startup to one of the biggest companies in the world today. Over the years, many have tried to challenge Microsoft’s position. But again and again, the Windows maker has managed to keep its crown.
It’s a similar story with the company’s “Office” productivity suite. Today, 80% of Fortune 500 companies are using “Office 365.” There is even a trend that companies previously using Google Apps, which is cheaper in several product categories, are now switching to Office 365. (Source: “Why companies are switching from Google Apps to Office 365,” CIO, October 14, 2015.)
Some say that Microsoft’s next big thing is going to be its augmented reality (AR) device “HoloLens.” While I agree that the AR industry has huge potential, I prefer finding segments that are proven to be profitable and will stay that way for a very long time.
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Fortunately, Windows and Office have provided Microsoft with those segments. The company’s “Productivity and Business Processes” segment, which includes “Office Consumer,” “Office Commercial,” and dynamic business services, brought in $6.7 billion in revenue in the most recent quarter. Microsoft’s “More Personal Computing” segment, which includes Windows, devices, gaming, and search advertising, generated an even larger $9.3 billion of revenue in the same period. (Source: “Earnings Release FY17 Q1,” Microsoft Corporation, October 20, 2016.)
Together, these two segments accounted for 78% of the company’s total revenue.
Things are even more impressive when you look at the remaining bits of Microsoft’s revenue. As it turned out, the segment responsible for that is “Intelligent Cloud,” the fastest-growing segment of the company. In the quarter, “Azure” revenue surged 116%, with Azure compute usage more than doubling year-over-year.
The Bottom Line on MSFT Stock
Don’t forget that the company’s well-entrenched position in the operating system market and the productivity software market means it can return some value to shareholders. MSFT stock investors have been collecting increasing dividends for more than a decade.
Right now, Microsoft stock pays $0.39 per share on a quarterly basis, translating to an annual yield of 2.58%.
The bottom line is that Microsoft has segments with wide economic moats and segments with huge growth potential. For dividend investors, the best could be yet to come.