Dividend yield, or dividends per share paid annually as a percentage of a company’s stock price, is an important factor for many dividend investors. After all, this metric determines the amount of cash flow an investor can expect to receive from an investment in an individual stock. But savvy investors know that dividend yield is only one thing to consider when considering a potential dividend investment. Another key factor to consider is the potential for dividend growth over time.

A dividend-paying stock that can too often be overlooked due to its low dividend is Microsoft (NASDAQ: MSFT). Despite a dividend yield of less than 1%, this is an excellent dividend stock thanks to the share’s overall attractiveness and the potential for significant dividend growth in the years to come.

Dividend history

Microsoft’s dividend has a pretty impressive history. Paying a first dividend in 2004, the company has paid dividends to its shareholders for 17 consecutive years. Additionally, Microsoft has increased its dividend every year for the past 16 years.

The most recent increase in the stock dividend was announced on September 14. Microsoft has announced that it will increase its quarterly dividend by $ 0.6, or 11%. Impressively, the company was able to do so while approving a new share buyback program that authorized the use of $ 60 billion for share buybacks.

The company’s quarterly dividend of $ 0.62 now translates to $ 7.44 per year. This gives Microsoft a dividend yield of around 0.8%.

Dividend growth potential

While Microsoft’s less than 1% dividend yield may seem unimpressive at first glance, the software giant is offsetting this small dividend yield with the potential for dividend growth.

There are several factors, beyond the long history of consistent and significant increases in the company’s dividends, that further underscore why Microsoft’s dividend is likely to grow significantly in the years to come.

First, Microsoft’s annual dividend payments are only 25% of Microsoft’s revenue. This means that there is plenty of room in Microsoft’s annualized earnings for its dividend to grow.

Second, Microsoft’s profits are growing rapidly. Net income for the past 12 months is $ 68 billion today. That’s roughly $ 61 billion for fiscal 2021, $ 44 billion for fiscal 2021, and $ 39 billion for fiscal 2019. With such earnings momentum like this, Microsoft probably won’t even have to increase its revenue. payout ratio significantly to increase its dividend.

Finally, Microsoft’s small-cap business model doesn’t appear to need much of its annualized free cash flow to operate and grow its business. Consider that over the last 12 months, Microsoft generated $ 60.4 billion in free cash flow (cash generated from operations), but only spent $ 21.5 billion in spending on business. ‘investment.

No investment, of course, is without risk. If Microsoft loses momentum in one of its main lines of business like Microsoft Office or Azure, for example, it could weigh on earnings and potentially impact the potential for dividend growth. But the software company’s long history of performance and diversified products and services suggest it will continue to increase results significantly in the years to come, supporting greater dividend growth.

Overall, Microsoft appears poised to continue increasing its dividend at double-digit rates each year for years to come.