- Tuesday, Microsoft announced a 10% dividend increase for shareholders on record on 17 November, bringing its per-share payout to $0.68
- Microsoft’s dividend increase puts it on track to become a full-fledged dividend aristocrat in 12 years
- As an investor, dividends are crucial for portfolio growth and hedging against inflation and volatility
Tuesday wasn’t Microsoft’s best day ever.
The stock opened $3 lower than Monday’s close, with shares slowly dwindling throughout the trading session. By Tuesday’s close, Microsoft had relinquished another 0.85%, bringing its monthly losses to 12.7% and its YTD losses to 27.6%.
In other words: Microsoft’s shareholders haven’t had a lot to cheer about this year, at least investment-wise. But a Tuesday announcement, while not enough to reverse course entirely, shone a ray of sunshine into tech’s gloomy world.
Microsoft’s dividend is going up – again.
A quick look at the Microsoft dividend increase
Tuesday morning, Microsoft announced a dividend hike of 10%, bringing the total dividend yield to about 1.1%. This quarter’s dividend will come out to $0.68 per share, or $2.72 on an annualized basis.
The company set an ex-dividend date of 16 November 2022, with stockholders on record as of 17 November eligible for the payout. The actual dividend will go out on 8 December this year.
While the dividend increase (a whopping 6 cents higher than last quarter’s) doesn’t seem like much, these small amounts add up. More than that, Microsoft’s dividend increase likely represents good news for Microsoft investors.
To start, Microsoft is one of the largest U.S. dividend payers, shelling out $18 billion during the last fiscal year alone. That management feels comfortable meeting and even exceeding this target suggests the firm remains confident about future prospects. As per-share earnings are projected to top $10 this year, Microsoft should cover its $2.72 annualized dividend with room to spare.
The dividend hike also suggests that Microsoft is continuing its 13-year tradition of raising dividends at least once a year. While it still has a ways to go before reaching dividend aristocrat status, it’s on the right path.
Unfortunately, all the negative attention on stock performance and inflation this year has shoved this kind of positive dividend news by the wayside. So, we thought we’d remind investors how important dividends can be to a robust investment strategy – and how they can help safeguard your returns against today’s torturous inflation.
Why do companies increase their dividends?
Companies increase dividend payouts for several reasons – some more positive than others.
For instance, companies that rake in higher profits may share this good fortune via shareholder payouts. Doing so rewards stockholders for their investment and entices new investors to park their capital where the money is.
In these cases, dividend hikes are often viewed positively, as they suggest a confident management team and profitable business plan.
However, companies that issue higher dividends without corresponding profit increases may be trying to lure new capital and boost cash flows. While that’s not innately problematic, it also lends room for pause.
On one hand, investor capital is a valid alternative to high-interest financing. On the other, luring investors with dividends can be a slippery slope. Sure, investors will enjoy their higher payments now. But if the company suffers poor leadership or sits in a tricky place financially, the well could easily dry up.
Companies may also hike dividend payouts:
- When they’re out of growth opportunities. Sometimes, well-established firms have no more room to grow due to shifting business plans, local regulations, or long-term production concerns. If expansion’s currently off the table, management may redirect free cash flow to rewarding investors, instead.
- To maintain their dividend growth records. Companies that hike dividends for 25 consecutive years are known as “dividend aristocrats.” Generally, these firms are viewed favorably as well-managed, financially stable opportunities. Once companies reach this status, they’re reluctant to relinquish it.
- To provide support for their stock price. Companies with a history of high payouts and dividend hikes may be more attractive to investors. More investors means more trading activity and capital, which can support a firm’s stock prices long-term.
Why invest in dividend stocks?
So far, we’ve established why companies like Microsoft increase dividends. But from the investor’s point of view, dividends can seem like a boring addition to potentially low-return investments. That’s especially true when you compare dividend stock performance to high-fliers like small-cap tech firms rife with volatility and potential.
So, why invest in Microsoft or other dividend-paying stocks?
It’s simple: math is on your side.
Dividends increase your portfolio returns
A recent Fidelity study found that dividends have comprised a solid 40% of stock market returns since 1930. More than that, these little payments can support your portfolio when stock prices dip – even in unrelated investments.
For instance, when S&P 500 stocks plunged during the 1930s and 2000s, dividends partially or nearly fully offset that decline. (Depending on where you invested.)
Dividends can help beyond the rough times, too. When the stock market rolls onward and upward, dividend payments provide extra cash to spend or reinvest as you please.
Dividends help fight inflation
The same Fidelity study found that dividends can be particularly powerful during high-inflation years.
For example, when the Consumer Price Index pegged inflation above 5%, dividends made up 54% of total equity market returns. And when inflation surged astronomically in the 1970s, dividends accounted for 71% of the S&P 500’s gains.
Additionally, history shows that, on average, companies that continue increasing dividends tend to outperform in extended high-inflation environments.
But there’s a catch: the best dividend stocks today may not be the same as last decade, or even last year. Consider firms that do or will prosper in the current economic climate. When inflation runs hot, that typically includes companies that can raise prices to offset rising costs, like energy firms or grocers.
Dividends can smooth volatility
Beyond hedging against inflation and boosting returns, dividends can also smooth your portfolio’s long-term volatility profile. Infusing your portfolio with regular cash payments can boost returns against choppy markets and downturns. (Plus, you can use the money to reinvest when the market drops.)
Additionally, because dividends provide support for individual stocks’ prices, some dividend-paying stocks may fare better than non-dividend-paying peers in rough climes.
So, what does Microsoft’s dividend increase mean for you?
Given this year’s underwhelming guidance and poor stock performance, it seems like there’s not much to like about Microsoft right now. (Or any tech stocks, for that matter.) But Microsoft’s dividend plans suggest this is one tech firm that believes in its future.
That Microsoft is increasing payments suggests that whatever net profits it plans to rake in – whether it meets analyst expectations or not – will sustain its dividends beyond the next quarter. And as a major tech firm of sizeable reach and influence, Microsoft’s product lines remain robust enough to help it weather current conditions.
As it stands now, Microsoft’s dividend increase will help the firm march toward coveted dividend aristocrat status while rewarding investors. At the same time, it appears as a vote of confidence among management that Microsoft can weather current headwinds with minimal damage. Only time will tell if management’s assurance is well-placed.
Enjoy gains without waiting for dividend payouts
As we’ve discussed, investing in dividend-paying stocks is a great way to boost your portfolio’s long-term performance. But you shouldn’t have to wait for a company’s quarterly payout to start seeing results.
With Q.ai, you don’t have to.
Investing in our Emerging Tech Kit gives you a chance to tap the lucrative (and volatile) potential of the tech space without waiting for a payout. Add our Inflation Kit into the mix, and you can hedge against price hikes while your dollars look to the future.
That’s the power of investing with AI.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.