Microsoft For Retirement Portfolios

| About: Microsoft Corporation (MSFT)

Summary

Microsoft just keeps on growing their dividends and should continue to do so for many years.

Their dividend yield of 2.8% is better than most companies in their industry.

When you add in their solid dividend growth, this stock is perfect for generating retirement income.

With Apple's (NASDAQ:AAPL) stock now down over 30% from its peak, a lot of focus has been on their earnings as well as their future dividend payments. But lost in the mix has been the story of Microsoft's (NASDAQ:MSFT) ever-growing dividends and solid dividend yield.

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Microsoft can now be looked at as a dividend-growth stock, beginning to show commitment to increasing dividends every year.

Dividend Yield 3 Year Annualized
Div. Growth Rate
5 Year
Annualized Div. Growth Rate
2.8% 15.7% 19.0%
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Over the last three years their dividend has increased at nearly a 16% annual clip. They also have enough cash on hand (about $85 billion) and free cash flow to weather nearly any storm, which means they can continue increasing their dividends even in a recession.

Microsoft For Retirement Portfolios

Microsoft is the type of stock that can set you up for retirement with the income you need so that you do not outlive your money. With interest rates so low, it is very difficult for many people to generate enough income in retirement.

Although the focus here will be on Microsoft, this also applies to many companies that have a long history of increasing, or at least not cutting, their dividends. Other strong dividend payers I have recommended for retirement portfolios are Exxon (NYSE:XOM), Altria (NYSE:MO), and Johnson & Johnson (NYSE:JNJ).

Microsoft Income Vs. Bonds

I used WealthTrace's retirement planning tools along with our planning software to compare and contrast a portfolio make up of bonds vs. mixing in dividend payments from Microsoft over time.

I started with some assumptions for a 45-year old couple currently only in treasury and corporate bonds yielding 2.9%. This couple has $450,000 saved today and they want to retire when they are 65 years old. I also assumed a 50/50 split between their IRA accounts and taxable accounts. Lastly, I used an annual inflation rate of 2%.

Below we see their results for their retirement plan if they are only invested in bonds:

Beginning Value
Of Account
Ending Value Of
Account (Nominal $)
Ending Value Of
Account (Real $)
Real Annual
Return After Taxes
$450,000 $675,000 $495,890 0.60%
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In 20 years their investments have only grown by a mere $45,890 if we reduce everything by the inflation rate. That is only 0.50% per year in real terms. I went a step further and place these numbers into our Retirement Planner and found that this couple would only have a 15% chance of not running out of money if they are saving $10,000 a year for the next 20 years, have retirement expenses of $45,000 per year, and receive a combined $35,000 per year in social security payments. They are in a bad situation and cannot retire at age 65.

Moving Them To Dividend-Growth Stocks

Now let's take a look at what happens to their situation if they move all of their money out of bonds and into solid dividend paying stocks like Microsoft. Note that I am not recommending that they only invest in one dividend payer. Investors should look for a diversified set of dividend payers with characteristics similar to Microsoft.

For this analysis I used Microsoft's current dividend yield of 2.8% and I assumed a 10% dividend growth rate over time. To be conservative I assumed only a 2% price increase in their stock per year. Their new results are below:

Beginning Value
Of Account
Ending Value Of
Account (Nominal $)
Ending Value Of
Account (Real $)
Real Annual
Return After Taxes
$450,000 1,709,000 $1,171,000 5.00%
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This looks so much better. Not only are they earning a 5% real rate of return each year, but their probability of plan success jumps to 85%. This is the power of dividend growth over time.

Investing in dividend-growth stocks like Microsoft should be done as early as possible so you can reap the rewards of the compounding dividends and dividend growth over time. For people already approaching retirement or in retirement, this strategy will not be quite as useful, but it can still be a big help to their retirement situation if they are mostly invested in low-yielding bonds.

Disclosure: I am/we are long XOM, JNJ, MSFT, MO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.