The Dynamic Dividend

Microsoft’s “Disappointing” Dividend Hike Makes Sense

Microsoft handed out its much-anticipated annual dividend hike after today’s closing bell in a move that will surely disappoint shareholders and give pundits another reason to take a swing at tech’s favorite punching bag.

The software giant declared a quarterly dividend of $0.20 per share, which is a 25% improvement over the $0.16 paid each of the previous four quarters. That’s a significant boost by most measures, but many have been urging the company to dig much deeper into its significant $50+ billion cash hoard to reward patient investors who’ve watched the stock go virtually nowhere over the last decade.

Of course, the logistics of handing shareholders an enormous raise overnight — many hoped and fantasized the company would double its dividend, while others bluntly suggested it — have never really added up.

CEO Steve Ballmer has long maintained that Microsoft would stick to its policy of raising payments in line with annual gains in operating income, which rose 13% during the fiscal year that ended in June. And whether you agree with that policy or not, there’s a valid reason it exists: As I’ve mentioned again and again and again and again and again, a huge chunk of Microsoft’s cash is held (about 85%) and earned (about 50%) outside the country. The company has done a lot of dumb things with its money, but paying the taxes associated with bringing it home just to hand it over to shareholders would be idiotic.

On the bright side, shares of MSFT closed today’s session trading at $26.98, where they now feature a 2.97% dividend yield. Even a slight pullback will push the stock’s yield over 3%, a figure it’s featured only once before — while the broader market was bottoming-out in early 2009.

Here’s a look at Microsoft’s dividend yield over the last seven years, updated to reflect today’s announcement:

Microsoft initiated its quarterly payout 2004, and the tech giant has improved its dividend output by at least 10% every year since, growing its payout by a total of 150% in the process.