These Dividend Stocks Just Gave Their Investors a Raise. Here’s Why It’s a Big Deal

Tech Titans Microsoft (NASDAQ: MSFT) recently increased its dividend by another one 11%. That new rate will cost the company about $25 billion annually. It will likely keep the company at the top of the global dividend payers.

Microsoft wasn’t the only company to give its investors a raise recently. Telecom giant Verizon (NYSE: VZ) raised its payout by less than 2%, while the leading real estate investment trust (REIT) Real estate income (NYSE: O) for an even more modest pay increase.

While Microsoft’s pay raise made headlines for its size, what’s even more important is how consistently these companies have increased their payouts (for more than a decade each). That’s because dividend growers have historically delivered the highest total returns.

The data about dividends

Hartford Funds and Ned Davis Research analyzed stock returns based on their dividend policies of 50 years ago. They found that the average dividend payer has delivered an average annual return of 9.2%. total return with lower volatility (0.94 beta) compared to the average member of the S&P 500 (The equally weighted S&P 500 index has delivered an average annualized total return of 7.7% with a beta of 1.0.) This is due to the much lower returns of dividend non-payers (4.3% with a beta of 1.18).

However, not all dividend stocks are created equal. Dividend growers and initiators drive returns:

Data source: Hartford Funds and Ned Davis Research.

This data clearly shows that dividend growth is a key driver of a stock’s outperformance. Even better, investors get those higher returns with less risk (measured by the lower beta).

Stocks with a high dividend yield

Microsoft has done an excellent job of growing its dividend. It has increased its payout by double digits annually in the past decade. Meanwhile, the growth streak has been going on for 20 years. Not surprisingly, Microsoft has delivered robust total returns over that period (more than 16% annualized compared to 11% for the S&P 500).

The tech giant will have no problem continuing to increase its payouts. It generates An enormous amount of annual cash on hand (analysts expect this to generate $81 billion in free cash flow next year). That will easily cover its expected dividend payout ($25 billion), giving it enough surplus to fund growth and buy back shares (it recently unveiled a new $60 billion buyback program). Meanwhile, Microsoft has a balance sheet full of cash and minimal net debt. The company is also growing at a healthy pacedriven by investments in cloud computing and artificial intelligence (AI).

The story continues

Verizon also has a strong record of increasing its dividend. It recently raised its payout for the 18th consecutive year, making it the longest current streak in the U.S. telecom sector. While Verizon only offered its investors a modest increase, it offers a high dividend yield (over 6%).

The telecom giant can easily afford its payout. It generated $16.1 billion in cash flow from operations during the first half of this year. That covered its capital expenditures ($8.1 billion) with $8.5 billion to spare. The company’s excess free cash flow was more than enough to fund its dividend payout ($5.6 billion). With its free cash flow rising as it invests in growing its 5G and fiber optic networksVerizon should be able to continue to grow its high-yielding dividend. While Verizon’s yields have lagged the market in recent years, it could deliver higher yields in the future because the investments revive growth (and keep the dividend higher).

Finally, Realty Income has recently increased upwards the monthly dividend from $0.263 per share to $0.2635 per share, an increase of 0.2%. That was the fifth increase this year (and the 127th since the IPO in 1994), extending its quarterly series to 108 in a row.

The REIT’s increases may be modest, but they’ve been consistent and powerful over the long term. It’s delivered a 13.5% annual total return since its IPO 30 years ago, driven by its high yield (recently around 5%) and steadily rising payout (4.3% compound annual dividend growth since 1994). Realty Income expects its adjusted funds from operating activities with an annual rate of 4% to 5% in the futurewhich should support continued dividend increases. Add that to the high yield and there is a clear path to double digit annual growth.

More dividend growth on the horizon

Dividend growth stocks have historically delivered the highest total returns. That is why investors should take note of the recent raises that Microsoft, Verizon and Realty Income have provided to their investors. With more growth on the horizon, they are in a solid position to produce above-average total returns in the future.

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Matt DiLallo has positions in Realty Income and Verizon Communications. The Motley Fool has positions in and recommends Microsoft and Realty Income. The Motley Fool recommends Verizon Communications and recommends the following options: long Jan 2026 $395 calls on Microsoft and short Jan 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

These Dividend Stocks Just Gave Their Investors a Raise. Here’s Why It’s a Big Deal was originally published by The Motley Fool