Microsoft and These 2 Growth Stocks Aren't Passive Income Powerhouses Yet, but They Continue to Raise Their Dividends at a Rapid Rate | The Motley Fool (2024)

One drawback of investing in growth stocks is that they tend to pay small dividends or no dividends at all. The idea is to reinvest capital into the business to grow its value rather than give investors the temporary benefit of a dividend payment. However, there's a limit to how much reinvestment is needed before it becomes borderline wasteful. That's why many growth companies take a more balanced approach to their capital return programs.

Microsoft (MSFT 0.53%), Broadcom (AVGO 4.16%), and Visa (V 1.21%) are good examples of former up-and-coming growth companies that have matured and no longer need to pour every ounce of excess profit back into their businesses. Despite their low yields, all three companies are highly committed to their dividends. Here's why they are all buys now.

Microsoft's growing dividend is one of many reasons to buy the stock

Microsoft has steadily increased its dividend, with annual dividend raises typically around 10% and the dividend nearly tripling in the last 10 years. Microsoft's annual dividend expense is now over $21 billion -- but it can easily afford it.

Microsoft's payout ratio is just 25% -- meaning that for every dollar in earnings per share (EPS), around $0.25 is going toward dividends per share. That's an affordable expense, especially for a company like Microsoft that has an extremely healthy balance sheet with more cash, cash equivalents, and marketable securities than debt.

Stock repurchases have also been a core aspect of Microsoft's capital return program. Despite a growing stock-based compensation expense, the company has reduced its outstanding share count by 10% over the last decade thanks to buybacks. However, there's been a noticeable shift in Microsoft's capital return strategy over the last year or so.

Microsoft is pulling back on buybacks to accelerate capital expenditures as it ramps up spending on product improvements and artificial intelligence (AI) investments. In the following chart, you can see that its stock buybacks are down about 50% compared to a couple of years ago, while its capex has rocketed higher.

MSFT Capital Expenditures (TTM) data by YCharts

The beauty of Microsoft's capital allocation strategy is that it can use buybacks as a lever to pull on when it needs more cash to invest in growth, or it can slow down on growth when there isn't a compelling opportunity. And yet, it still can buy back enough stock to more than offset stock-based compensation -- thereby avoiding dilution.

The key takeaway here is that Microsoft is so profitable it can afford a massive and steadily growing dividend while still investing in growth. With a price-to-earnings (P/E) ratio of 33.8,Microsoft isn't a particularly expensive stock either -- especially relative to some of its megacap growth peers.

Broadcom is so much more than an AI play

Broadcom's dividend has increased around fivefold in the span of just seven years. It has emerged as arguably the best dividend-paying semiconductor stock as it passes along profits directly to shareholders. But that doesn't mean Broadcom is taking its foot off the gas when it comes to growth.

Broadcom makes a variety of hardware components for storage and systems, wireless and wired connectivity, mainframe and enterprise software, cybersecurity, and more. It benefits from increased investment in global connectivity and the need for greater computing power to support AI models. In this vein, Broadcom isn't a pure-play AI stock. It was doing just fine before the recent surge in AI investment. However, Broadcom's sales of AI chips are soaring, which could lead to AI being a larger share of its revenue mix going forward.

In addition to its balanced business and growing dividend, Broadcom is also not overpriced -- with a forward P/E ratio of 28.7. Broadcom yields 1.5%,which may not sound like much, but it's actually higher than the S&P 500's yield of 1.3%. What's more, Broadcom's low yield is more a result of its outperforming stock price than a lack of dividend raises. Broadcom is up nearly threefold in the last three years. Without that gain, the yield would be over 4%.

Add it all up, and Broadcom is a great way to invest in AI without paying up for a stock with a nosebleed valuation.

Visa can win no matter what the economy is doing

Visa is another great example of a company that has evolved into a balance of growth, income, and value. Visa has increased its dividend for 16 consecutive years -- with the dividend up 420% over the last decade. Despite the rapid increases, Visa's yield is just 0.8% -- again largely due to an outperforming stock price.

But as impressive as Visa's dividend raises have been, they're far from the only way the company returns capital to shareholders. Visa has reduced its outstanding share count by 21% over the last decade. The following chart showcases multiple reasons why Visa has been such a winning investment over this time period -- with the stock up nearly 400% paired with a growing capital return program.

V data by YCharts

While it's hard to dispute the strength of Visa's track record, investors care more about where a company is headed than where it has been. And fortunately for Visa investors, the company's position looks stronger than ever.

Visa charges merchants fees when Visa credit and debit cards are used to make a transaction.Although Visa benefits from higher spending, it isn't a cyclical stock in the same way as a company that depends heavily on the economic cycle and capital investment.

It's also worth noting that Visa is extremely resistant to inflation -- and if anything, benefits from it because inflation means higher nominal spending. And it's unlikely Visa's costs would increase at the same rate.

But Visa also benefits from lower interest rates, which spur economic growth.

In sum, Visa wins when money changes hands in higher dollar amounts.

Visa has also capitalized on the transition from cash to mobile and digital payments, as well as digital currency conversions as opposed to cash conversions.

Visa's near-perfect business shows no signs of slowing. And best of all, the stock is not overpriced, with a P/E ratio of 27.5.

Quality companies at a reasonable price

Microsoft, Broadcom, and Visa are vastly different businesses, but they are remarkably similar stocks. All three companies can afford to dividends without compromising their growth prospects. Given their solid fundamentals and industry-leading positions, all three stocks also sport reasonable valuations.

All told, Microsoft, Broadcom, and Visa are on the right track to becoming passive income powerhouses and are worth buying for investors interested in top companies without the ultra-premium price tag.