Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) are arguably two of the best dividend stocks (NASDAQ:AAPL). Though their dividend yields are currently low, with Microsoft’s at 1% and Apple’s at 0.7 percent, income-seeking investors should not neglect these income-producing options. Not only do these corporations increase their dividends on a regular basis, but their distributions are expected to increase significantly in the coming years. Which of these two dividend-paying companies, however, is the superior investment?
Let’s have a look at what we’ve got.
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Microsoft
Many businesses were negatively impacted by the coronavirus epidemic, with some well-known dividend-paying corporations even lowering or suspending their quarterly payouts. Microsoft, on the other hand, did not miss a beat.
Last September, the IT giant announced a 10% raise in its quarterly dividend, bringing the total payout to $0.56 every quarter, or $2.24 annually. It was the company’s 16th annual dividend increase in a row.
Of course, Microsoft’s decision to maintain its long history of yearly dividend hikes was unsurprising. Dividends are easily afforded by the corporation. Only $15 billion of the company’s $45 billion in fiscal 2020 free cash flow (cash flow remaining after routine operating expenses and capital expenditures have been deducted) went to dividends. In fiscal 2020, the company’s payout ratio, or the percentage of net income paid out in dividends, was just 34%.
With a low payout ratio and an average annual dividend increase growth rate of 9% over the last three years, Microsoft’s dividend should continue to rise well in the years ahead.
Apple
Although Apple’s dividend yield is lower than Microsoft’s, its payout ratio of just 22% is far lower. To put it another way, Apple’s dividend has a lot of room to expand in the years ahead.
Furthermore, Apple’s strong free cash flow of $73 billion in fiscal 2020 is much higher than Microsoft’s, and the gap between Apple and Microsoft’s free cash flow has expanded during the trailing 12-month period. Apple’s free cash flow was $80.2 billion over this time period, whereas Microsoft’s was $50.4 billion.
Of course, Apple is more valuable than Microsoft. The corporation has a market valuation of $2 trillion, compared to $1.7 trillion for Microsoft. However, based on this financial study, Apple appears to be worth the additional market capitalization. It is, without a doubt, the more promising and stable dividend stock. However, its victory may be by a razor-thin margin, if at all. Both tech stocks appear to be worthy possibilities for investors looking to acquire equities with the potential to generate significant long-term income.
This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.
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