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Here's Why Microsoft Will Continue Paying Dividends to Investors

Stocks in this article: MSFT

NEW YORK (TheStreet) -- If you are an investor in technology stocks, you know they have been gaining a lot of momentum recently.

That rising tide includes some old boats. For instance, there’s Microsoft (MSFT). The company’s new CEO, Satya Nadella, has been in the news since replacing Steve Ballmer, tasked with turning the software developer giant into a growth company once again.

Shares, at $44.50, are up 19% for the year to date.

Read More: Amazon Fire Phone Review: That's All Ya Got?

Microsoft has a history of making its dividend payments, as this chart shows. The company has been a very impressive cash generator and is well known for giving good returns to its shareholders.

Currently, Microsoft's dividend yield is around 2.8% and dividends have increased by 16.4% over the past five years on average.

Payout Ratio

The payout ratio of a company can determine whether or not it is actually paying dividends from profits being earned or if dividends are a false indicator of growth in the company. A payout ratio below 100 means that the company is easily paying the dividends from its earnings; a payout ratio of over 100% indicates a company is paying out dividends more than what its net income is.

To determine the sustainability of dividends, it is crucial to analyze the payout ratio. A relatively higher payout ratio indicates higher chances of the stock not being sustainable. Microsoft currently has a payout ratio  of around 38%, which indicates that the stock is highly sustainable. It is currently paying its dividends from what it is earning and its dividends actually represent growth in the company.

R&D

For a tech firm, research and development is of crucial importance. Microsoft's transition to cloud-based offerings  ensures the company is trying to remain among the leaders in the sector and that growth prospects seem favorable.

Read More: Facebook's Blowout Earnings Are Even More Impressive Than You Thought

Such situations create a sense of confidence in the company's performance and suggest that returns to shareholders will be sustained by the company since they would be a continuum of growth in the company.

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