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Battle of Dividends: Apple vs. Microsoft

Daniel Sparks, The Motley Fool

Though both Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) are as technological as tech stocks come, they are both powerful dividend stocks as well. Not only has each company been paying out dividends for years, but these dividends are growing every year. But which is a better dividend stock?

Here's a look at each of these stocks' dividends to help income investors decide which company should get more of their money.

The front of an Apple store in Bangkok, Thailand.

Image source: Apple.

Apple

Apple's dividend track record is impressive. Since initiating a dividend in 2012, the company has increased its dividend every year. Over the past five years, its dividend has grown at an average annual compound rate of 10.8%. Apple's most recent increase, however, was particularly strong. Along with its fiscal second-quarter results announced on May 1 of last year, the company said it was increasing its quarterly dividend by 16%. This put Apple's quarterly dividend at $0.73, or $2.92 on an annual basis.

Making the stock particularly attractive, Apple has a reasonable dividend yield today since shares have come down from levels last fall. Worries about Apple's iPhone business have driven the company's stock lower, giving investors an opportunity to buy the stock with a significantly higher dividend yield than it had last September. Though Apple stock has recovered some in the past few months, shares are still trading well below highs around $230 in September. In turn, Apple's dividend yield of 1.6% today is much more attractive than the 1.2% dividend yield at the end of September.

Looking ahead, investors can expect Apple's dividend to continue growing. Though the tech giant's earnings per share are expected to decline slightly in fiscal 2019 as the company works through a challenging iPhone product cycle and tough year-ago comparisons, rapid growth in services and continued strength in other non-iPhone segments will likely help the company return to bottom-line growth in fiscal 2020 and beyond, supporting dividend growth for years to come.

In the meantime, Apple's extremely conservative payout ratio -- dividend payments as a percentage of earnings -- of just 24% means the tech giant has plenty of room for dividend increases even if its bottom line flounders.

Microsoft executive discusses the power of Microsoft Azure.

Image source: Microsoft.

Microsoft

Since initiating a dividend in 2003, Microsoft has similarly demonstrated a strong trend of dividend growth. Between fiscal 2013 and fiscal 2019, Microsoft's dividend doubled, rising at an average compound rate of 12.3%. The company's most recent dividend hike represented a 9.5% increase. This gives the stock a dividend yield of 1.6% at today's prices.

Like Apple, Microsoft has plenty of room for dividend growth in the coming years. Of the company's trailing-12-month free cash flow of $31.9 billion, Microsoft paid out just $13.2 billion in dividends. Equally as important, the software giant is seeing strong business growth -- and there's no sign of this momentum fizzing out. Consider Microsoft's most recent quarter. Revenue for the period was up 12% year over year, and operating income was up 18% over the same time frame. With impressive momentum in the company's commercial cloud products, Microsoft looks poised for double-digit top- and bottom-line growth in 2019 and beyond.

Since investors count on more predictable and stable business growth from Microsoft than Apple while scooping up the same dividend yield from either, dividend investors may want to allocate more money toward Microsoft than Apple. But both stocks are attractive investments for those looking for a reliable, growing stream of dividends.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.