Why Microsoft Is a Great Income Stock Despite a 0.77% Yield

When mapping out compound growth scenarios, one trick to use is the "Rule of 72." To see how long it takes an amount to double at a fixed growth rate, divide 72 by the rate of increase for your answer. For instance, capital growing at 8% a year will double in nine years, while an investment compounding at 10% a year will double in roughly seven.

The Rule of 72 is imprecise, but it gets you close. Even if the doubling takes a few years, you would be surprised at how that can add up over an investing lifetime. For instance, the S&P 500's average annual gain since 1975 is 12.2% each year, including dividends. Using the Rule of 72, that's a double roughly every six years, which doesn't sound life-changing. Yet it's enough to turn every $100 invested 50 years ago into $33,854.

The Rule of 72 jumped out at me when researching historical dividend growth for Microsoft (NASDAQ: MSFT). Since it began raising its dividend in 2010, Microsoft's payouts have grown by an average annual rate of 13.9%. While only a 15-year streak, that's faster than the S&P 500's average annual growth over the last half century, and it's powerful enough for Microsoft's dividend to have increased by 600% since 2010.

What if one of the world's top five most profitable and powerful companies keeps up this average dividend growth? Here's what the numbers say.

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How Microsoft's 0.77% yield could snowball

Microsoft's 600% dividend growth since 2010 means that anyone who bought shares in January of that year would now be enjoying a yield on cost of 11.8%. This means that for every $10,000 invested then, investors would be collecting $1,180 in 2025. That's not a bad outcome when the same $10,000 invested in 10-year Treasuries today would pay $414, while the average S&P 500 company would pay $117 in dividends on that capital.

If Microsoft's dividend grows at the same average annual rate as it has over the last 15 years, its 0.77% yield would mushroom into 5.39%. That's a lower yield on cost than 2010 investors are seeing today. However, there are three reasons to think that, far from plateauing or slowing down, Microsoft's dividend growth could exceed its 15-year average going forward.

Start with net cash flow from operations. This metric, sometimes abbreviated as CFO, measures the cash a company generates from regular business operations, showing the amount of cash left over after salaries, overhead, energy bills, and all other operating costs are paid. After keeping the lights on, it's what a company has left over for acquisitions, dividends, and share buybacks.

In Microsoft's case, net operating cash flow totaled $136.16 billion in fiscal year 2025. That's compared to the $24.07 billion in net operating cash flow that the company logged in the 2010 fiscal year.

So CFO has grown by 466% since 2010, a slower rate of growth than Microsoft's 600% dividend hike in that time frame. That would seem to augur for the dividend growth slowing down from here.

But wait. Microsoft has also bought back 1.5 billion of its own shares since 2010, as part of an aggressive share buyback program. In 2010, its dividend was mailed out to shareholders owning 8.9 billion of the shares outstanding between them. In 2025, there are now just 7.43 billion shares outstanding.

These extra 1.5 billion shares in 2010 mean that Microsoft was then paying 19.2% of its CFO to cover its dividend. In 2025, it's paying 19.8% of its CFO to do so. These near-identical numbers show that Microsoft has as much breathing room now to grow its dividend as it did in 2010.

But there's more. The share buybacks haven't been linear, and Microsoft's share buyback activity took off like a rocket last year when its board approved a $60 billion repurchase program. It's one of the biggest buyback programs in history, with only Apple, Alphabet, and Meta announcing larger ones.

Finally, there's earnings growth to consider. Last quarter, Microsoft grew earnings by 12.5% year over year. While not a blockbuster figure, its stellar operating margin of 48.9% means that roughly half of those increased earnings are available to go toward the dividend should management choose. And this earnings growth is roughly in line with the average annual growth rate for its dividend that Microsoft has achieved since 2010.

A lot can happen in 15 years, but Microsoft's near-identical percentage of CFO going toward its dividend as in 2010, combined with its historic share buyback program and solid earnings growth, makes its future dividend growth likely to match or even exceed the 600% growth it's notched since then. Income investors should not be deterred by the stock's current yield of under 1%, given its likelihood of becoming a formidable income stream in just a few years' time.

William Dahl has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Microsoft. 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.