Microsoft Corporation (NASDAQ:MSFT) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Microsoft's shares on or after the 18th of August, you won't be eligible to receive the dividend, when it is paid on the 9th of September.
The company's next dividend payment will be US$0.56 per share, and in the last 12 months, the company paid a total of US$2.24 per share. Calculating the last year's worth of payments shows that Microsoft has a trailing yield of 0.8% on the current share price of $289.81. If you buy this business for its dividend, you should have an idea of whether Microsoft's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Check out our latest analysis for Microsoft
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Microsoft paid out a comfortable 28% of its profit last year. A useful secondary check can be to evaluate whether Microsoft generated enough free cash flow to afford its dividend. It distributed 29% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Microsoft has grown its earnings rapidly, up 26% a year for the past five years. Microsoft is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Microsoft has increased its dividend at approximately 13% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Has Microsoft got what it takes to maintain its dividend payments? We love that Microsoft is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.
While it's tempting to invest in Microsoft for the dividends alone, you should always be mindful of the risks involved. For example - Microsoft has 1 warning sign we think you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.