Better Dividend Stock: Microsoft or Apple, Inc.?

By Markets Fool.com

In the technology world, Apple and Microsoft Corporation both get a lot of attention. Of course, there is good reason for this. Both companies offer beloved products with loyal customer bases, and they are two of the biggest businesses on the planet.

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For investors, there's a lot to like as well. Both Apple and Microsoft have richly rewarded investors over the past several years, and in recent years, they have aggressively raised their dividends as well. Investors who love dividends can now look at Apple and Microsoft as great opportunities for income.

If you have to pick one, here's which stock might be better for dividend enthusiasts.

Both companies are growing
Importantly, both Microsoft and Apple are in high-growth mode. Microsoft is seeing great success on both sides of its business, hardware and software. Devices and consumer revenue grew 11% last quarter, in constant currency. This was due to rising subscriptions for Office 365, which soared 35% year over year. In addition, tablet revenue jumped 53% thanks to strong sales of the Surface Pro 3. Also, search advertising revenue grew 24%, as Bing's market share in the U.S. rose by 150 basis points.

On the commercial side, revenue grew 7% in constant currency. Driven by cloud-based Office 365, Azure, and Dynamics, Microsoft's commercial cloud revenue more than doubled last quarter, year over year, and has now reached a $6.3 billion annualized rate. Overall, Microsoft's currency-neutral revenue increased 9% last quarter.

Meanwhile, Apple is also doing very well and it's hardly a secret as to why. The iPhone is the biggest driver of Apple's growth. In fact, Apple raked in $40 billion in iPhone sales just last quarter, thanks to the huge success of the iPhone 6, as iPhone revenue jumped 55% year over year.

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Microsoft's dividend advantage
While both companies have extremely strong fundamentals, Apple's dividend growth rate has fallen short lately. Apple raised its dividend by 11% this year, after an 8% dividend raise last year.

These are respectable growth rates, but considering Apple's tremendous earnings growth in this time period, the company could have delivered more on its dividend. For example, Apple generated more than $47 billion of free cash flow in the first half of its fiscal year. In that same period, the company paid just $5.5 billion of dividends, which equates to a free cash flow payout ratio of only 11%.

Instead, Apple prefers to allocate a much bigger portion of its capital allocation program toward share buybacks. Over the first two quarters of the fiscal year, Apple spent $12 billion on share buybacks, more than twice the amount spent on dividends.

Share buybacks are a valuable tool to increase shareholder wealth. When employed properly, share repurchases can greatly help to increase earnings-per-share growth, since the company has fewer shares outstanding to divide its profits among. But for dividend investors, this might not measure up.

This is where Microsoft has a distinct edge over Apple. Microsoft raised its dividend by 11% last year, and by 21% the year before. Plus, not only does Microsoft grow its dividend at higher rates than Apple, but its dividend yield is much higher. Microsoft's 2.7% yield is significantly above Apple's 1.6% yield. That means an investor will reap 68% more income from Microsoft versus Apple, for every dollar invested.

The reason for this disparity is that Microsoft is not buying back stock as aggressively as Apple. Over the first three quarters of its fiscal year, Microsoft spent $10 billion on buybacks and $7.3 billion on dividends, which is a much more balanced mix than Apple.

Better dividend pick: Microsoft
There's no doubt that both Apple and Microsoft are worthy investments. They are each growing, generate lots of free cash flow, and have low amounts of debt on the balance sheet to worry about.

But for investors who focus on income, Apple may not be the best choice right now. Due to its tremendous stock rally over the past year, its dividend yield is down significantly, and its pace of dividend increases has not kept up. By comparison, Microsoft's higher dividend yield and higher dividend growth rate make it the better pick for income investors.

The article Better Dividend Stock: Microsoft or Apple, Inc.? originally appeared on Fool.com.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.