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Why the Dividend Yield of Microsoft Has Taken a Downturn

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A look at Microsoft’s revenue and earnings

Let’s start by looking at Microsoft (MSFT), a technological MNC (multinational corporation) involved in the development, manufacturing, and licensing of software products, services, and devices all over the world. Since 2015, Microsoft has recorded growth in its service and other revenue, offset by a fall in product revenue. Its 5.0% revenue growth in 2017 has been mainly driven by productivity and business processes and intelligent cloud, offset by more personal computing and other segments. This comes after a revenue slump of 9.0% in 2016 due to growth and flat growth posted by intelligent cloud and productivity and business processes, respectively, offset by the rest. Operating income rose 11.0% in both 2016 and 2017. The 2017 growth was driven by improved gross margins and lower impairment, integration, and restructuring expenses. Growth in 2016 was mainly due to lower operating, impairment, integration, and restructuring expenses, offset by a lower gross margin. Diluted EPS (earnings per share) rose 29.0% in 2017 compared to 42.0% in 2016, also supported by share buybacks. The company has maintained an impressive free cash flow balance.

Microsoft’s dividend trajectory

Microsoft’s dividend trajectory has been on a declining trend since 2016 despite the continuous increase in dividends. That’s due to rising prices, as shown in the chart below. However, Microsoft has maintained a dividend yield of more than 2.0%.

Let’s look at two dividend ETFs that have exposure to Microsoft. The First Trust NASDAQ Technology Dividend ETF (TDIV) offers a 2.2% dividend yield at a PE (price-to-earnings) multiple of 18x. It has a 79.0% exposure to technology. The Vanguard High Dividend Yield ETF (VYM) offers a 2.9% dividend yield at a PE multiple of 21.6x. It has a 15.0% and 14.0% exposure to technology and healthcare, respectively.

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