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Why Microsoft Corporation (MSFT) Could Be the Next Great Dividend Aristocrat

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The Dividend Aristocrats are a select group of companies that have increased their dividends for 25 years or more.

The list is a great starting point for income investors who are looking for some of the best dividend stocks to invest in.

The reasoning is simple: dividend stocks with a track record of raising dividends for many years represent strong businesses with wide economic moats, capable management teams, and leading brands in their industries.

While Microsoft Corporation (NASDAQ:MSFT) is not yet a Dividend Aristocrat, having raised its dividend for 14 years, it is almost assured to become one.

Microsoft is currently 1 of 274 Dividend Achievers – stocks with 10+ years of consecutive dividend increases.

The company has delivered very high rates of dividend growth for many years, thanks to its highly profitable business model which generates huge amounts of free cash flow.

MSFT Dividends

The stock offers a market-beating 2.8% dividend yield. It offers income investors the best of both worlds—a high yield and high dividend growth.

As a result, Microsoft could be the next great Dividend Aristocrat.

Among the investors tracked by Insider Monkey, Microsoft saw a boost in popularity during the fourth quarter, as the number of investors long the stock surged to 140 from 113. These funds amassed around 5.30% of the company’s outstanding stock. Billionaire Ken Fisher’s Fisher Asset Management reported holding 18.22 million shares of Microsoft in its 13F filing for the end of the first quarter.

Underlying Fundamental Strength

Microsoft Corporation (NASDAQ:MSFT) has come a long way since the bursting of the 1999 tech bubble.

In those days, many high-flying technology companies, including Microsoft, were much more speculative than they are today. They were not nearly as consistently profitable as they are now.

But Microsoft took control of the software industry, through its highly popular suite of products including Microsoft Office and its Windows operating system. Nowadays, Microsoft is turning focus to the cloud.

Microsoft has demonstrated significant progress in breaking away from the personal computer market, which is in decline.

Instead, it has positioned itself into higher-growth areas like the cloud. Due to the success of cloud-based platforms like Office 365 and Azure, Microsoft’s commercial cloud revenue soared 96% in the fourth quarter of fiscal 2015. Microsoft’s growth in recent years has been impressive; revenue was up 7% in fiscal 2015. It produced $23 billion of free cash flow in fiscal 2015. Microsoft has proven to be a phenomenal cash flow generator over many years.

MSFT Free Cash Flow
Source:  YCharts

Microsoft’s successful performance continued into fiscal 2016. Adjusted revenue and earnings per share, excluding the effects of foreign exchange, rose 5% and 10%, respectively, in the fiscal third quarter.

Once again, the cloud products were the major driver. Office 365 posted 63% constant-currency revenue growth, while revenue from the Intelligent Cloud business rose 8% in constant currency. Azure revenue increased 120% in constant currency last quarter. Overall, its commercial cloud business has exceeded a $10 billion annualized revenue run rate.

It has also seen great results from its gaming business. Driven by the release of the Xbox One console, Xbox Live monthly active users increased 26% last quarter.

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