What Should You Know Before Buying Microsoft Corporation (NASDAQ:MSFT) For Its Dividend

Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. In the past 10 years Microsoft Corporation (NASDAQ:MSFT) has returned an average of 2.00% per year to investors in the form of dividend payouts. Does Microsoft tick all the boxes of a great dividend stock? Below, I'll take you through my analysis. Check out our latest analysis for Microsoft

How I analyze a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Is it the top 25% annual dividend yield payer?
• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
• Has the amount of dividend per share grown over the past?
• Is is able to pay the current rate of dividends from its earnings?
• Will it have the ability to keep paying its dividends going forward?

How does Microsoft fare?

The company currently pays out 55.55% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 40.13%, leading to a dividend yield of around 1.92%. However, EPS should increase to $3.52, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment. If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you're eyeing out is reliable in its payments. In the case of MSFT it has increased its DPS from $0.44 to $1.68 in the past 10 years. It has also been paying out dividend consistently during this time, as you'd expect for a company increasing its dividend levels. These are all positive signs of a great, reliable dividend stock. Relative to peers, Microsoft generates a yield of 1.81%, which is high for Software stocks but still below the low risk savings rate.

Next Steps:

With this in mind, I definitely rank Microsoft as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I've put together three essential aspects you should further examine:

• 1. Future Outlook: What are well-informed industry analysts predicting for MSFT’s future growth? Take a look at our free research report of analyst consensus for MSFT’s outlook.
• 2. Valuation: What is MSFT worth today? Even if the stock is a cash cow, it's not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MSFT is currently mispriced by the market.
• 3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.