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Sign of a dead growth stock: Microsoft's 3% dividend yield

January 22, 2009 |  6:49 pm

Buy Microsoft Corp. shares for their dividend?

For a true growth stock, the dividend yield is supposed to be an afterthought.

But for much of this decade, the dividend is all that long-time Microsoft investors have been able to count on. The stock has mostly been dead money -- a situation the company only made worse on Thursday with its latest earnings report.

Microsoft shares dived $2.27, or 11.7%, to $17.11 -- an 11-year low -- after the company said earnings in its second fiscal quarter ended Dec. 31 fell 11%, and that it would cut up to 5,000 jobs.

Microsoftlogo Microsoft pays a quarterly dividend of 13 cents a share, or 52 cents a year. At Thursday’s closing stock price, the annualized dividend yield was 3% (the dividend rate divided by the share price).

That’s richer than the yields on shares of Procter & Gamble (2.8%), Exxon Mobil (2%) or Walt Disney (1.7%), among other blue-chip companies.

Microsoft’s yield also is more than five times the average 0.56% yield on money market mutual funds.

In its glory days of the 1980s and 1990s, as its earnings mushroomed and its stock rose almost non-stop, the software titan never bothered to pay a dividend. Few true growth companies did; dividends were expected from older, slower-growing companies that couldn’t hope to reward investors with rapid share-price gains.

Microsoft paid its first dividend in 2003. And measured since the end of 1999, dividend income has been the only source of an investment return on Microsoft’s stock. The share price is down 67% since the end of ’99, when the tech-stock bubble was reaching maximum inflation.

Even measured since the end of 2002, when the tech bear market reached its nadir, Microsoft stock is down 26%, compared with a 10% gain for the Nasdaq composite index.

Microsoft held $20.7 billion in cash and short-term securities on Dec. 31. Its quarterly dividend now amounts to just 28% of per-share earnings. Obviously, it could afford to pay out more -- which is what financially strong companies typically do when they can’t offer investors the promise of significant share-price appreciation.

As an investor, you'd prefer that your stock's dividend yield rises because the payout rises, not because the share price drops.

This concept seems lost on the folks in Redmond, Wash.

-- Tom Petruno

Photo credit: Paul J. Richards / AFP Getty Images

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