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Microsoft (MSFT) traded ex-dividend on 5/15/2012 with a payout of $0.20 per share. This is an increase of 25% over the $0.16 paid in the same quarter last year. MSFT has a current yield of 2.75%, based on the closing price on 5/24/2012 of $29.06. Pretty good for a large tech stock.

Microsoft's dividend compound annual growth rate has been increasing over the last 5 years with its most recent boost doubling up on both the 3 and 5 year historical dividend CAGRs. The following table shows the dividend CAGR for 1, 3, and 5 years along with annual dividend payments made since 2003. Note the chart doesn't include the special $3 dividend paid in 2005, to prevent skewing of the normal dividend growth rate.

Year20022003200420052006200720082009201020112012
Annual Dividend PaidN/A0.08000.16000.32000.34000.39000.43000.50000.52000.61000.8000*
CAGR Growth Rates10 YR 5 YR 3 YR 1 YR
N/A 15.45% 16.96% 31.15%

*Indicated dividend for fiscal 2012.

Microsoft has increased the dividends paid to shareholders since it started paying dividends in 2003 and shows promise with its accelerating dividend CAGR. With an increasing rate of dividend growth it's always a good idea to do a little research on the sustainability of that growth. Two key ratios to help gauge dividend health and sustainability are EPS and payout ratio. The following chart compares the annual dividends paid, earnings per share, and payout ratio for Microsoft since 2003.

The graph clearly shows an increasing trend in EPS and dividends paid while the payout ratio remains relatively flat. This is a great sign for dividend sustainability. MSFT is not raising its dividend every year simply by increasing the payout ratio.

Now that we have shown that Microsoft is exhibiting an accelerating dividend CAGR with sustainability, let's take a look at the kind of future cash flow we might expect from MSFT in the next 20 years. The following table shows the yield on initial cost and cumulative dividend return at the 5 and 3 year historical CAGRs of 15.45% and 16.96% respectively.

YearYield on Initial Cost at 10 YR CAGRCumulative Dividend ReturnYield on Initial Cost at 5 YR CAGRCumulative Dividend ReturnYield on Initial Cost at 3 YR CAGRCumulative Dividend Return
1

N/A

N/A

2.75%2.75%2.75%2.75%
2

N/A

N/A

3.17%5.92%3.22%5.97%
3N/AN/A3.67%9.59%3.76%9.73%
4N/AN/A4.23%13.82%4.40%14.13%
5N/AN/A4.89%18.71%5.15%19.27%
6

N/A

N/A

5.64%24.35%6.02%25.29%
7

N/A

N/A

6.51%30.86%7.04%32.33%
8N/AN/A7.52%38.38%8.23%40.57%
9N/AN/A8.68%47.06%9.63%50.20%
10N/AN/A10.02%57.08%11.26%61.46%
11

N/A

N/A

11.57%68.65%13.17%74.63%
12

N/A

N/A

13.36%82.00%15.41%90.04%
13N/AN/A15.42%97.42%18.02%108.06%
14N/AN/A17.80%115.22%21.08%129.14%
15N/AN/A20.55%135.77%24.65%153.79%
16

N/A

N/A

23.73%159.50%28.83%182.63%
17

N/A

N/A

27.39%186.89%33.72%216.35%
18N/AN/A31.62%218.52%39.44%255.79%
19N/AN/A36.51%255.03%46.13%301.92%
20N/AN/A42.15%297.18%53.96%355.88%

The table shows that we can expect to be rewarded nicely with significant yield on initial investment if Microsoft can keep up the high rate of dividend growth. A yield on initial investment range could conceivably be between 42% and 54% after 20 years of compound annual growth.

I am long MSFT. Given the recent strength in dividend boost this past year, I will be looking to add to my position given the right buying conditions.

Source: Microsoft: Dividend Growth Analysis For Long-Term Investors