Many of the best income investments out there are stocks that Mr. Market likes to ignore or dismiss as outdated. A classic example of this in recent years has been Microsoft (NASDAQ: MSFT).
The software giant has been plugging along making huge piles of money even as the tech press has been full of articles trumpeting its impending doom. Not surprisingly the market has ignored the historic software producer which is sad because it is a great stock.
More importantly, Microsoft is a great income and value investment which makes it a widows and orphans stock in my opinion. A widows and orphan stock is an equity that is so dependable, you can invest the money of people who need dependable income in it.
Microsoft is making an Incredible Amount of Money
The best thing about Microsoft is the incredible amount of money that it makes. Some of the financial numbers that it reported on June 30, 2016, are absolutely staggering.
The highlights of those numbers include:
- $113.24 billion in cash and short-term investments. That means the amount of money Microsoft had in the bank at the end of second quarter exceeded its revenues which were $85.32 billion.
- $16.50 billion in net income.
- A free cash flow of $5.809 billion.
- $33.32 billion cash from operations.
- A profit margin of 15.14%.
The numbers prove that Microsoft’s core business of making and licensing software is both extremely profitable and generates an incredible amount of float. If all you are looking for is income this is certainly a stock for you.
Why Microsoft is a Great Income Stock
All this makes Microsoft a great income stock for either a short or a long term investor. It paid investors a 21.65% return on equity on June 30, 2016.
Those investors also received a 2.49% dividend yield on October 6, 2016. That was certainly higher than Oracle (NYSE: ORCL) which delivered a 1.52% yield on the same day.
Microsoft shareholders are scheduled to receive a 39¢ dividend on November 15, 2016. That’s a 3¢ increase over August 16, 2016, when they received 36¢. More importantly that dividend has been going up every year for the past few years according to ycharts.
Microsoft paid a 31¢ dividend in August 2015, 28¢ in August 2014, 23¢ in August 2013, and 20¢ in August 2012. Microsoft’s dividend has nearly doubled in just four years.
Microsoft Meets some Classic Buffett Value Criteria
Now for what is truly interesting from a value investor’s standpoint. Microsoft meets some of Warren Buffett’s criteria for a really good company. These include:
- It is not sexy or flashy but it makes a lot of money.
- Microsoft makes products that everybody needs; software and operating systems, but few people think about. I’m writing this story using Microsoft Word on a computer with a Windows Operating system.
- Microsoft generates so much cash that it will still make a lot of money if it loses a lot of its revenue. Microsoft’s revenue fell by $8.18 billion between June 2015 and 2016; yet it still managed to increase its dividend yield. For the record: Microsoft reported a TTM revenue of $93.58 billion in June 2015 that fell to $85.32 billion a year later.
- Microsoft’s core business, software licensing, is so simple that even your idiot nephew could run it. Buffett has described a good business one that your idiot nephew could run and make money. Selling software is not as glamorous as peddling the newest iPhone, but it’s certainly lucrative.
- Microsoft is cheap. It was trading at $57.75 a share on October 6, 2016. That means even an investor with fairly with modest means could accumulate several dozen or several hundred shares of it.
- Microsoft is one of those stocks you don’t have to think about. It always makes money, even when revenues are falling.
- Microsoft is boring. Even its new technology is often dull, which is good because speculators leave it alone for that reason.
All this makes Microsoft a great income investment. It is not that exciting but you will make money with it, which is the goal with income stocks. If you want a reliable income stock for your portfolio, Microsoft is still a great pick.