This Is My Favorite Dividend Stock (by Far)

Key Points

• Microsoft's dividend is small but secure, with a payout ratio of just 24%.

• The software company returned over $37 billion to shareholders in fiscal 2025 through dividends and buybacks, while still investing heavily in artificial intelligence (AI) and cloud technologies.

• A fortress-like balance sheet, recurring revenue, and steady cloud growth should support years of dividend increases.

• 10 stocks we like better than Microsoft ›

Microsoft (NASDAQ: MSFT) is not a high-yield dividend stock. Far from it. Indeed, the yield currently sits well below 1%.

But yield alone doesn't define a dividend stock. Staying power, disciplined capital allocation decisions from management, and the ability to keep raising the payout through thick and thin all matter more than a headline percentage.

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These are some of the key reasons why Microsoft is my favorite dividend stock. The company blends predictable, recurring revenue with steady earnings growth and a conservative payout ratio. The software giant funds the dividend out of abundant free cash flow, while still pouring massive sums into important growth opportunities like artificial intelligence (AI) and cloud infrastructure.

The result is a payout you can count on -- and one that can grow for years.

Image source: Getty Images.

What the latest numbers show

Microsoft just closed fiscal 2025 (ended June 30) with double-digit growth. Revenue rose 15% to $281.7 billion, and operating income increased 17% to $128.5 billion. Fourth-quarter results were even stronger, helped by a big step-up in Azure.

Azure and other cloud services revenue grew 39% year over year in Q4, bolstering total revenue in the intelligent cloud segment Azure and other cloud services belong to, to $29.9 billion -- up 26% year over year.

Those results translate into ample dividend coverage. Microsoft's current quarterly dividend is $0.83 per share ($3.32 annually). Against fiscal-year diluted EPS of $13.64, that's a payout ratio of roughly 24%. In other words, about three-quarters of earnings remain to reinvest in the business or return via buybacks.

Consistency is another reason this dividend stands out. The board raised the quarterly payout by 10% last September, giving the stock a dividend yield of about 0.7% as of the stock's price today. This growth rate in the company's dividend increase is right in line with its 10-year average growth rate for the payout, continuing a long stretch of dividend growth and highlighting management's confidence in future cash flows.

Even better, management's approach to returning capital to shareholders goes beyond dividends. In fiscal 2025, Microsoft returned over $37 billion to shareholders through dividends and buybacks ($24 billion of this sum was paid in dividends), including $9.4 billion in the fourth quarter alone ($6.1 billion of this amount was dividends).

Why the model works

A payout this dependable starts with a fortress balance sheet and elite credit quality. Microsoft is one of the few companies with AAA/Aaa ratings from S&P Global and Moody's. That lowers financing costs and reflects durable, diversified cash generation across Microsoft 365, Azure, and a broad software estate.

At the same time, robust and durable financials enable the company to confidently fund business growth and the dividend together. Management guided to more than $30 billion of capital expenditures in the first quarter of fiscal 2026, largely to expand AI and cloud capacity -- and they are doing this while still sending billions home to shareholders. That's exactly the setup I love: Invest for tomorrow, pay me today, and raise the payout over time.

The business mix also supports steady dividend growth. Microsoft's revenue is subscription-heavy and enterprise-anchored. Office, Azure, Windows commercial, and Dynamics together create a recurring engine that is less cyclical than ad-driven or hardware-only tech company models.

And Microsoft's Q4 print underscored this resilience. Its total cloud-based revenue reached $46.7 billion, up 27%.

Put it all together, and you get an excellent recipe for dividend investors. The dividend consumes a modest slice of earnings. Cash generation should rise with the help of steady subscription growth. Management has a long, visible habit of raising the payout each year while also buying back stock. And the balance sheet is best in class.

Years of raises ahead

Should investors expect much in terms of dividend yield? No. But that's fine. I'm here for safety and growth, not a stretched payout that risks a cut in the next storm.

With Microsoft, the math works. Earnings are expanding. The payout ratio gives management room. And the company's appetite for returning cash remains strong, as fiscal 2025 showed.

Importantly, none of this depends on perfect economic conditions. If growth slows, Microsoft can trim buybacks before it ever touches the dividend. If growth accelerates, the board can keep boosting the payout at a high-single-digit (or better) clip without straining the model. Either way, the dividend continues to move in the right direction.

Sure, as a tech company, investors must monitor rapidly evolving technologies and intense competition to ensure Microsoft maintains its strong position in key markets. But given the breadth of Microsoft's offerings, I believe the company will likely make up for any trouble with strength in other areas.

This is the kind of dividend I want to own for a long time: conservative today, bigger tomorrow, and backed by one of the strongest franchises in business. That's why Microsoft is, by far, my favorite dividend stock.

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Daniel Sparks and his clients has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Moody's, and S&P Global. The Motley Fool 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.