How does Microsoft’s dividend hike affect investors?

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Key learning points

  • On Tuesday, Microsoft announced a 10% dividend increase for shareholders registered on Nov. 17, bringing the payout per share to $0.68.
  • Microsoft’s dividend hike puts it on track to become a full-fledged dividend aristocrat in 12 years
  • As an investor, dividends are crucial to portfolio growth and to hedge inflation and volatility

Tuesday wasn’t Microsoft’s best day ever.

The stock opened $3 lower than Monday’s close, with shares slowly shrinking during the trading session. By the end of Tuesday, 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 much to cheer about this year, at least in terms of investment. But an announcement on Tuesday, while not enough to completely reverse course, shone a ray of sunshine in the bleak world of technology.

Microsoft’s dividend is going up again.

A quick look at Microsoft’s dividend hike

On Tuesday morning, Microsoft announced a 10% dividend increase, bringing the total dividend yield to about 1.1%. This quarter’s dividend will be $0.68 per share, or $2.72 year-over-year.

The company set an ex-dividend date of November 16, 2022, with shareholders eligible for the payout from November 17. The actual dividend will be paid on December 8 of this year.

While the dividend increase (a whopping 6 cents higher than last quarter) doesn’t seem like much, these small amounts add up. More than that, Microsoft’s dividend hike is probably good news for Microsoft investors.

For starters, Microsoft is one of the largest dividend payers in the US, at $18 billion in the past fiscal year alone. That management feels comfortable meeting and even exceeding this target suggests that the company remains confident in its future prospects. With earnings per share expected to hit $10 this year, Microsoft should cover its $2.72 annual dividend with room to spare.

The dividend hike also suggests Microsoft is continuing its 13-year tradition of raising dividends at least once a year. While it still has a long way to go before it achieves dividend aristocrat status, it is on the right track.

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Unfortunately, all the negative focus on stock performance and inflation this year has pushed this kind of positive dividend news aside. So we thought we’d remind investors how important dividends can be to a robust investment strategy — and how they can help protect your returns from today’s torturous inflation.

Why do companies increase their dividend?

Companies are increasing dividend payments for a variety of reasons – some more positively than others.

For example, companies that bring in higher profits can share this happiness through payouts to shareholders. This rewards shareholders for their investment and entices new investors to park their capital where the money is.

In these cases, dividend increases are often viewed positively, as they indicate a confident management team and profitable business plan.

However, companies that issue higher dividends without corresponding profit increases may seek to raise new capital and boost cash flows. While that isn’t inherently problematic, it also provides space for pause.

On the one hand, investor capital is a valid alternative to high-yield financing. On the other hand, luring investors with dividends can be a slippery slope. Certainly, investors will now enjoy their higher payments. But if the company suffers from poor leadership or is in trouble financially, the well can easily dry up.

Companies can also increase dividend payments:

  • When they have no more growth opportunities. Sometimes incumbents don’t have room to grow due to changing business plans, local regulations, or long-term production issues. If expansion is currently off the table, management can redirect free cash flow to rewarding investors.
  • To maintain their dividend growth records. Companies that increase dividends for 25 consecutive years are known as “dividend aristocrats.” In general, these companies are rated favorably as well-managed, financially stable opportunities. Once companies have achieved this status, they are reluctant to give it up.
  • To support their share price. Companies with a history of high payouts and dividend increases may be more attractive to investors. More investors means more trading activity and capital, which can support a company’s stock prices over the long term.
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Why invest in dividend stocks?

So far, we’ve identified why companies like Microsoft are raising dividends. But from an investor’s point of view, dividends can seem like a boring addition to potentially low-return investments. That’s especially true when you compare the performance of dividend stocks to high-fliers like small-cap tech companies full of volatility and potential.

So why invest in Microsoft or other dividend-paying stocks?

It’s simple: math is on your side.

Dividends increase the return of your portfolio

A recent Fidelity study found that since 1930, dividends have accounted for 40% of stock market returns. In addition, these small payments can support your portfolio when stock prices fall, even in unrelated investments.

For example, when S&P 500 stocks plummeted in the 1930s and 1920s, dividends partially or almost completely offset that decline. (Depending on where you invested.)

Dividends can also help after the hard times. When the stock market goes up and down, dividend payments provide extra money to spend or reinvest as you see fit.

Dividends help fight inflation

The same Fidelity study found that dividends can be particularly potent during years of high inflation.

For example, when the consumer price index linked inflation above 5%, dividends made up 54% of the total return in the stock market. And when inflation soared astronomically in the 1970s, dividends accounted for 71% of the S&P 500’s earnings.

In addition, history shows that companies that continue to raise dividends tend to outperform on average in environments of prolonged high inflation.

But there’s a catch: Today’s best dividend stocks may not be the same as last decade, or even last year. Think of companies that do or will do in the current economic climate. When inflation is high, that typically includes companies that can raise prices to offset rising costs, such as energy companies or grocers.

Dividends can dampen volatility

In addition to hedging inflation and increasing returns, dividends can also smooth out your portfolio’s long-term volatility profile. By providing your portfolio with regular cash payments, you can increase returns against volatile markets and recessions. (Plus, you can use the money to reinvest when the market drops.)

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In addition, because dividends support the prices of individual stocks, some dividend-paying stocks may outperform non-dividend-paying counterparts in harsh climates.

What does Microsoft’s dividend increase mean for you?

Given this year’s disappointing outlook and poor stock performance, it seems there isn’t much to like about Microsoft right now. (Or any tech stock for that matter.) But Microsoft’s dividend plans suggest this is a tech company that believes in its future.

Microsoft’s increase in payments suggests that the net profit it plans to bring in — whether it meets analyst expectations or not — will support its dividends beyond the next quarter. And as a major technology company with wide reach and influence, Microsoft’s product lines remain robust enough to withstand today’s conditions.

As it stands, Microsoft’s dividend hike will help move the company toward coveted dividend aristocrat status while rewarding investors. At the same time, it seems a vote of confidence among management that Microsoft can weather the current headwinds with minimal damage. Only time will tell if management’s assurance is well placed.

Enjoy profits without waiting for dividend payments

As we discussed, investing in dividend-paying stocks is a great way to improve the long-term performance of your portfolio. But you don’t have to wait for a company’s quarterly payout to see results.

With Q.ai you don’t have to.

Investing in our Emerging Tech Kit gives you the chance to tap into the lucrative (and volatile) potential of the tech space without waiting for a payoff. Add our inflation kit and you can hedge against price increases while your dollars look to the future.

That is the power of investing with AI.

Download Q.ai today to access AI-powered investment strategies. If you deposit $100, we will add an additional $50 to your account.

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