In Search of a Massive Dividend: Microsoft
Dividends are a hot topic for many investors right now. The turmoil of the financial meltdown is still fresh and the tangibility of a quarterly cash payout hits the spot like a cool glass of lemonade on a midsummer day in the desert.
Not surprisingly, investors have been drawn to companies that feature massive dividend yields. And why not? If you're going to go for dividends, why not go big.
But the catch is that many -- if not most -- of the companies with huge dividend yields get those yields by paying out nearly all, if not all, of their income through those dividends. Take the popular mortgage REIT Annaly Capital (NYS: NLY) , for instance. Over the past 12 months, the company has paid out 85% of its income in dividends and over the past three 12-month periods, its average payout ratio has been 127%.
By focusing on the dividend yield alone, investors can end up overlooking the bigger picture. A dividend-paying company with a high payout ratio may have a tougher time maintaining its payout if it hits a speed bump. It may also have little capital left to reinvest in the business and might be forced to load up on debt or sell new shares if it wants to grow.
A laser-focus on dividend yields also means that investors may not be comparing potential investments on an apples-to-apples basis.
At first glance, Microsoft's (NAS: MSFT) 2.5% payout may look meager next to Annaly's whopping 14.2% dividend, but over the past 12 months, Microsoft has paid out a mere 22% of its income in the form of dividends.
What would happen if Microsoft were more like Annaly and paid out 90% of its income? That small 2.5% yield would suddenly jump to 10.1%.
Sure, Microsoft's business has its challenges -- Apple (NAS: AAPL) is kicking its butt in mobility while Google (NAS: GOOG) is threatening the company's core productivity software business. But I guarantee that investors would be tripping over themselves to buy Microsoft stock if it suddenly had a 10.1% payout.
A big fan of dividends myself, I applaud investors' interest in buying companies that know how to share their profits. However, in the quest for income, it's important that these intrepid yield seekers don't miss the big picture.
At the time this article was published The Motley Fool owns shares of Annaly Capital Management, Microsoft, Google, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Google, and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.Fool contributorMatt Koppenhefferowns shares of Microsoft, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolorFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.
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