Rewind twenty years and people would think you were crazy looking for dividend stocks in the technology sector. Not only were firms pouring all of their cash into growth opportunities, but it was far too early in the tech revolution to be confident enough in future cash flows to offer a dividend.
But that was then, and this is now. With the onset of the capital-light software-as-a-service (SaaS) business model, many of today’s top software companies are finding that they have far more cash than they know what to do with. That makes them ideal candidates for dividend investors.
But one stands head and shoulders above the rest: Microsoft (NASDAQ: MSFT) and its current 2.2% yield. Read below to see why this is such a solid software dividend to buy.
The most important thing
Before we dive into the dividend itself, let’s tackle the primary concept you should be focused on: Microsoft’s sustainable competitive advantage, or “moat.” The company actually has three different divisions:
- Productivity and Business Processes: this includes Microsoft Office and LinkedIn
- Intelligent Cloud: primarily the company’s Azure cloud offering.
- Personal Computing: including both the Windows operating system, advertising revenues from Bing, and physical products like the Xbox and Surface.
Here’s how much each division contributes in terms of sales and gross profit.
I include this table to make one thing clear: though the company manufactures physical goods and runs Internet services like LinkedIn, it is the company’s software — mostly from the Office Suite, but also via Windows — that is the high-margin income driver.
The Office Suite alone has a very powerful moat around it: high-switching costs. Normally, I would argue that this couldn’t be that true with a word and data processor, but Microsoft’s…