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 via 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 yield for shareholders.
Companies that raise their dividends each 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.
While 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 began 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 right now.
1. Microsoft Delivers Solid Fiscal Q1 Results
Microsoft reported revenue of $56 billion in fiscal Q1 of 2024 (ended in September), an increase of 13% year over year. It also reported adjusted earnings of $2.99 per share for the period. Microsoft not only surpassed revenue estimates, it also beat earnings estimates by a healthy 12.8% in the September quarter.
2. Stellar Growth Estimates
Despite its massive size, Microsoft is forecast 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 gaming.
Analysts expect sales to rise by 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 remarkable given the current macro environment.
3. Microsoft's Major AI Footprint
Another major driver for Microsoft in the upcoming decade will likely be its multi-billion-dollar investment in OpenAI, one of the pioneers of the artificial intelligence space. Open AI owns ChatGPT, which was among the fastest platforms to attract a user base of over 100 million - and after a high-profile executive shakeup over the weekend, MSFT just named newly ousted OpenAI CEO Sam Altman to head its own AI unit.
Microsoft should benefit from an early mover advantage in this highly disruptive vertical, which might surpass a market size of $1 trillion by 2030.
4. A Sustainable Payout Ratio
Microsoft stock currently offers shareholders a dividend yield of 0.81%, which admittedly isn't the highest. However, that's 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 enough 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 pace commands a premium valuation.
Out of the 36 analysts covering MSFT, 30 recommend “strong buy,” three recommend “moderate buy,” and three recommend “hold.” The average target price for MSFT is $397.37, indicating an upside potential of 6.6% from current levels.
