This Stock Could Anchor a Dividend Portfolio

Technology stocks are not typically viewed as stalwarts of dividend payments.

Technology can be a notoriously volatile industry, where companies need to invest aggressively in new products and services to keep up with the perpetually evolving technology landscape.

But the largest, most highly profitable blue chip technology stocks can be just as strong of dividend payers as any other group.

[ad#Google Adsense 336×280-IA]One in particular, Microsoft (NASDAQ: MSFT), pays a 3.2% dividend that is about as rock solid as one can find.

Here is why Microsoft can be the cornerstone of a dividend portfolio.

Strong Free Cash Flow, Excellent Balance Sheet

The Microsoft dividend has recently taken a leap.

On Sept. 16, Microsoft announced a fantastic 16% dividend increase.

One of Microsoft’s biggest strengths is that it generates prodigious free cash flow. This is because Microsoft enjoys the benefits of a streamlined and efficient business model that does not require significant capital investment by the company.

Microsoft is seeing robust growth in its strategic growth initiatives, primarily the cloud. To that end, cloud revenue increased 88% last quarter, and reached an annualized rate that now exceeds $8 billion, due to the continued success of Office 365, Azure and Dynamics.

Microsoft is enjoying broad-based growth across its other products as well. Tablet revenue grew 117% year-over-year thanks to continued success of the Surface Pro 3. Xbox revenue increased 27%, and last but not least search revenue rose 21% as Bing captured an additional 100 basis points of search share year over year.

For example, Microsoft raked in $5 billion of free cash flow in the fiscal fourth quarter, and generated $23 billion of free cash flow in fiscal 2015. The company’s free cash flow payout ratio stood at just 42% for the full fiscal year, which gave it plenty of room to increase its dividend again.

Moreover, Microsoft has a formidable balance sheet that is stuffed with cash. At the end of last quarter, Microsoft held $108 billion in cash, short-term investments and long-term investments, up from $100 billion at the same point last year. And, its long-term debt-to-equity ratio is just 34%.

In fact, Microsoft is one of only three U.S.-based companies to hold a triple-A credit rating from Standard & Poor’s. This is a testament to Microsoft’s excellent financial position, exhibited by low debt and a cash-rich capital structure.

Take Advantage of Microsoft’s Dividend Yield

Microsoft’s ability to generate free cash flow and its strong balance sheet allow the company to raise its dividend each year. Including the most recent dividend raise, the Microsoft dividend has now grown by 17% per year over the past five years.

Now that Microsoft increased its payout by 16%, the stock yields 3.2%. At that level, Microsoft offers a dividend yield that towers above the 2% average dividend yield in the S&P 500. In addition, Microsoft has the financial flexibility to raise its dividend at double-digit rates each year, thanks to its strong business and cash flows.

Microsoft is a rare breed. Its stock is attractive both for investors who want income now, such as retirees, as well as for dividend growth investors who have a longer investing time horizon.

— Bob Ciura

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Source: Wyatt Investment Research