Battle of Dividends: Apple, Inc. vs. Microsoft

Image source: The Motley Fool.

Times have changed. Once the Street's growth darlings, Microsoft (MSFT -1.27%) and Apple (AAPL -1.22%) are now mature dividend stocks. For much of their publicly traded existence, both companies were commonly known as growth investments; opting to reinvest their earnings into new opportunities and focus on growth meant investors looking for income had to turn elsewhere. But afters years of rapid growth, these two companies have now turned into stable cash cows, paying fat dividends to their shareholders.

Paying a dividend since 2004, income investors are likely used to thinking of Microsoft as an income investment. Apple, on the other hand, is a newer tech giant to the dividend scene, and many investors may still be warming up to the idea of the iPhone maker paying out a consistent stream of cash to investors. But even though Apple is a newer dividend stock option for income investors, it's a formidable one -- possibly even a better than Microsoft, depending on what prospective dividend investors are looking for.

For a better idea of how these dividend stocks compare, here's a close look at each.

A higher yield

Data for table retrieved from Morningstar, Reuters, and Microsoft's dividend history on its investor relations website. Table source: author.

During the last five years in particular, Microsoft has stood out as a solid dividend investment because of the stock's meaningful dividend yield. During this period, Microsoft's dividend yield has mostly remained between 2.25% and 3.15%. Today, Microsoft has a meaningful dividend yield of 2.5% -- well over the average dividend yield of 2.2% for stocks in the S&P 500.

Microsoft's dividend has also performed well when it comes to growth. Annual dividend payouts increased an average of 11.7% per year during the past three years.

But a close look at Microsoft's business suggests there's a chance the company may not be able to keep up dividend growth like this over the long haul. In particular, the company's average annual EPS decline during the past three years of 8.4% is a bad sign future dividend growth. If a similar trend continues over the next three years, management may be more reluctant to increase Microsoft's dividends at similar rates.

Notably, in light of Microsoft's recent success with its Office 365 cloud services and its commercial cloud server business, it looks like there's hope for EPS growth. Indeed, the Microsoft's non-GAAP EPS actually increased 11% year over year in the company's most recent quarter.

Greater growth prospects

Data for table retrieved from Morningstar, Reuters, and Apple's dividend history on its investor relations website. Table source: author.

Apple's 2% dividend yield falls short of both Microsoft's and the average dividend yield of stocks in the S&P 500, but Apple stock stands out when it comes to dividend growth prospects.

While Apple's EPS has increased an average of 13.5% annually during the past three years, this isn't the main reason investors should expect meaningful growth in the company's dividend over the long haul. What does a better job of highlighting Apple's dividend growth potential is the company's extremely low payout ratio of just 24.8%. This means Apple is paying out only about one of every four dollars of its net income in dividends. A payout ratio this small means Apple can continue to increase its dividend for years to come even if the company struggles to grow EPS.

Overall, both stocks are good options for investors looking for income. But each stands out for a different reason. Microsoft looks like the better bet for investors looking for higher cash payouts today, and Apple looks like the winner when it comes to dividend growth prospects.