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Is Microsoft Upgrading its Dividend Program?

Traditionally, the technology sector hasn’t exactly been known for its overly generous dividend programs.

In the tech world, it’s R&D, acquisitions and grow, grow, grow… right?

Five years ago, that was more or less true. In 2007, the tech grouping in the S&P 500 Index accounted for only 5.6% of dividend payouts.

Well, times have changed (even if perceptions have not), because fast-forward to today, and now that figure clocks in at 13.2%.

What’s more, according to FactSet data, year-over-year growth for aggregate dividend payments in the S&P’s Technology grouping clocked in at 26.8%. That’s second-best only to Financials (33.2%).

That could be because many companies in the industry are reaching maturity – reorienting from stock growth to dividend growth. Or maybe board room directors are simply waking up to the reality that shareholders are coming to expect dividends.

Either way, tech stocks are officially on the dividend bandwagon. As S&P’s Senior Index Analyst, Howard Silverblatt, says, “The takeaway: Tech is a payer.”

In that vein, here’s one big-name tech stock that’s showing some dividend potential…

Slow Out of the Gate, But Picking Up Speed…

Ubiquitous tech overlord, Microsoft (Nasdaq: MSFT), started paying dividends in 2003. Increases were paltry in the first few years – a penny here, a penny there (special dividends, notwithstanding).

But then in 2008, the giant stirred, upping its dividend growth rate, which is now at a three-year average of 16.03%. That’s up from a five-year average of 15.25%. And all in all, it’s increased 31% since its first payment.

Just yesterday, it announced another 15% increase to its dividend to $0.23 a share, or $0.92 annualized, giving it a projected yield of 2.9%. That’s not far above the average yield of S&P 500, but it sure beats the industry average of just 1.1%.

The steadily increasing attention Microsoft is paying to dividends is a sign that the company is maturing. Gone are the stock growth days of the ‘90s, when it saw an absolutely massive rise in its share price. For the last decade and change, MSFT has been more or less flat. As a result, management has had to get serious about enticing shareholders by paying them dividends.

So why hasn’t it been more aggressive about doing so? It certainly has the cash hoard to support larger payouts.

The reality is that while it might be sitting on a lot of cash (around $55 billion), almost all of it is effectively out of reach, sitting overseas. Pulling it back on shore and paying it out in dividends would require also paying what’s called a repatriation tax. At 35%, it’s a significant haircut and a huge disincentive.

Still, Microsoft’s showing itself worthy of serious consideration as a dividend payer. Its five-year average dividend growth rate of 15% is better than respectable, and its 2.9% yield is far above industry average.

That said, MSFT is slightly overvalued at the moment with a price-to-earnings ratio of 15.6, which is slightly above its 13.8 five-year average. It could be worth it (for the patient among you) to see valuations fall slightly before buying in.

Best regards,

Ryan Anders