Technology Titan Microsoft (NASDAQ: MSFT) recently increased its dividend by another 11%. This new rate will cost it about 25 billion dollars per year. It should allow the company to remain among the world’s top dividend payers.
Microsoft isn’t the only company to recently give its investors a raise. Telecommunications giant Verizon (NYSE: VZ) increased its payouts by less than 2%, while being the largest real estate investment trust (REIT) Real estate income (NYSE: O) provided an even more modest pay increase.
While Microsoft’s pay raise made headlines because of its size, what’s even more important is the consistency with which these companies have increased their payouts (over a decade each). Indeed, companies that increase their dividends have historically generated the highest total returns.
Dividend data
Hartford Funds and Ned Davis Research analyzed stock returns based on their dividend policies over a 50-year period. They found that the average dividend payer generated an average annualized return of 9.2%. total return with lower volatility (0.94 beta) relative to the average member of the S&P 500 (The equal-weight S&P 500 index generated an average annualized total return of 7.7% with a beta of 1.0.) This is due to the much lower returns of non-dividend-paying companies (4.3% with a beta of 1.18).
However, not all dividend stocks are created equal. The companies that generate dividends and the initiators of these stocks are the ones that generate the returns:
|
Dividend policy |
Returns |
Beta |
|---|---|---|
|
Dividend producers and initiators |
10.2% |
0.89 |
|
No change in dividend policy |
6.7% |
1.02 |
|
Dividend Cutters and Eliminators |
-0.6% |
1.22 |
Data source: Hartford Funds and Ned Davis Research.
These data clearly show that dividend growth is a key engine of a stock’s outperformance. Better yet, investors get these higher returns with less risk (as measured by the lower beta).
High-growth dividend stocks
Microsoft has done a great job of increasing its dividends. It has increased its payments at a double-digit annual rate over the last decade. Meanwhile, Microsoft’s growth story goes back 20 years. Unsurprisingly, Microsoft has generated robust total returns over that period (over 16% annualized versus 11% for the S&P 500).
The tech giant should have no trouble continuing to grow its revenue. It generates A huge quantity of money every year (analysts expect it to generate $81 billion in free cash flow next year). That will easily cover its planned dividends ($25 billion), leaving it with enough surplus to fund growth and buy back shares (it recently unveiled a new $60 billion buyback program). In the meantime, Microsoft has a cash-rich balance sheet with minimal net debt. The company is also growing at a healthy pacefueled by its investments in cloud computing and artificial intelligence (AI).
Verizon also has an excellent track record of increasing its dividend. The company recently raised its dividend for the 18th consecutive year, maintaining the longest current streak in the U.S. telecommunications industry. While Verizon has only given its investors a modest increase, it offers a high dividend yield (over 6%).
The telecom giant can easily afford its payout. It generated $16.1 billion in cash flow from operations in the first half of this year. That covered its capital expenditures ($8.1 billion) with $8.5 billion in reserves. The company’s excess free cash flow was more than sufficient to fund its dividend payments ($5.6 billion). With its free cash flow increasing as it invests in growing its 5G networks and fiber optic networksVerizon should be able to continue to raise its high-yield dividend. While Verizon’s yields have lagged the market in recent years, it could generate higher returns in the future while its investments relaunch its growth (and keep the dividend rising).
Finally, Realty Income has recently increased up its monthly dividend from $0.263 per share to $0.2635 per share, an increase of 0.2%. This is its fifth increase this year (and the 127th since its IPO in 1994), extending its quarterly streak to 108 in a row.
The REIT’s capital increases may be modest, but they are consistent and significant over the long term. It has generated a total annual return of 13.5% since its IPO 30 years ago, thanks to its high yield (recently around 5%) and its steadily increasing payout (4.3% compound annual dividend growth since 1994). Realty Income plans to grow its adjusted operating funds at an annual rate of 4 to 5% in the futurewhich should allow for continued dividend growth. Add to that its high yield, and you have a clear path to double-digit annualized total returns.
Further dividend growth to come
Dividend growth stocks have historically produced the highest total returns. It is Why investors should take note of the recent capital raises that Microsoft, Verizon and Realty Income have granted to their investors. With more growth ahead, they are well positioned to produce above-average total returns. in the future.
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Matt DiLallo holds positions in Realty Income and Verizon Communications. The Motley Fool holds positions in and recommends Microsoft and Realty Income. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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