Investing in dividend growth stocks is one way for investors to grow long-term wealth and generate outsized gains. Dividend-paying companies return a portion of their profits to shareholders through dividends. If a company is able to grow earnings and cash flows each year consistently, it will also increase its dividends – resulting in a higher effective return for shareholders.
Companies that collect their dividends every year for 25 consecutive years are called Dividend Aristocrats. These elite dividend stocks are often favored by investors due to their proven ability to generate cash flows across market cycles.
Although it’s not quite there yet, Microsoft ( MSFT ) is one mega-cap tech stock that’s on track to achieve Dividend Aristocrat status in the next few years. The tech giant started paying shareholders a dividend back in February 2003. Its quarterly dividends have risen from $0.08 per share in 2003 to $0.75 per share today, indicating an annual growth rate of 11.3%, which is quite exceptional.
In the last 20 years, MSFT stock has returned 1,360% to shareholders. After adjusting for dividend reinvestments, total returns are closer to 2,230%. Here are five reasons to buy this future Dividend Aristocrat now.
1. Microsoft Delivers Solid Q1 Fiscal Results
Microsoft reported revenue of $56 billion in fiscal Q1 of 2024 (ended September), an increase of 13% year over year. It also reported adjusted earnings of $2.99 per share for the period. Not only did Microsoft beat revenue estimates, it also beat revenue estimates by a healthy 12.8% in the September quarter.
2. Star Growth Ratings
Despite its sheer size, Microsoft is projected to grow its top line by double-digit percentages in fiscal 2024, thanks to its exposure to multiple growth markets — such as enterprise software, public cloud, artificial intelligence (AI)and video gaming.
Analysts expect sales to rise 14.8% to $243.2 billion, while earnings are estimated to jump more than 14% to $11.24 per share in fiscal 2024, which is notable given the current macro environment.
3. Microsoft’s Largest AI Footprint
Another important driver for Microsoft in the next decade will probably be its a multi-billion dollar investment in OpenAI, one of the pioneers of the space of artificial intelligence. Open AI owns ChatGPT, which was among the fastest platforms to attract a user base of more than 100 million – and after a high-profile management change over the weekend, MSFT has just named recently fired OpenAI CEO Sam Altman to head his own AI unit.
Microsoft should benefit from an early mover advantage in this highly disruptive vertical, which could exceed a market size of $1 trillion until 2030.
4. Sustainable Payout Ratio
Microsoft stock currently offers shareholders a dividend yield of 0.81%, which is certainly not the highest. However, this is backed by a solid two decades of consecutive dividend growth, putting MSFT well on pace to earn Dividend Aristocrat status in the coming years. And with a reasonable payout ratio of just 26%, Microsoft has plenty of room to keep growing its dividends in 2024 and beyond.
5. Analysts Are Bullish on MSFT
Priced at 33x forward earnings, MSFT trades at a premium – but a blue-chip stock growing at a stellar rate commands a premium valuation.
Of the 36 analysts covering MSFT, 30 recommend a “strong buy,” three recommend a “moderate buy” and three recommend a “hold.” The average target price for MSFT is $397.37, indicating a potential upside of 6.6% from current levels.
As of the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.