Microsoft just like a bond?

Following my blog on Microsoft (MSFT), I saw an interesting comment questioning why bothers to put money in MSFT as it is nothing better than investing in Treasury bonds. To some extent, I'd agree with this view as from the safety perspective, indeed the money in MSFT is as safe as Treasury, or even safer I'd say. But making MSFT equivalent to Treasury in terms of investment return is so shocking to me that I think I need to provide some education here. Apparently there is quite lack of knowledge about dividend investment vs bond investment, which may not be only among a small number of people. Let me first start with a quick brief how bonds work.




Yield and bond price move inversely from each other. So when yields are rising (i.e., when interest rates are rising), bond prices are falling.  Let's say a bond is issued for a yield of 4%. If you bought that bond for $100 you would get $4 in interest each year, no matter where the price of the bond is trading at any given moment. Now let's say that bond's price fell from $100 to $70, a buyer of that bond at $70 would still receive $4 per year in interest, exactly same as the person who bought the bond at $100 would. Obviously receiving $4 per year on an $70 investment would get a current yield of 5.7% per year, not 4% anymore. And if the bond price continued falling all the way down to $50, the buyer of the bond at that price would receive a current yield on investment of 8% - i.e., $4/$50. That's why investing in bonds when interest rates go up is a terrible investment as your money cannot compete with the rising interests, i.e. your money is devalued due to inflation. Yes, you will always get your principle money back after maturity plus the accumulated interests you get during the period. But will you be happy with the less valued money even if you still have the same amount back?




Now let's get back to the initial question, is investing in MSFT for dividends the same as for bonds. For comparison purpose, let's assume we put money $10,000 for 20 years with the same 2% interest/dividend at the outset. As explain, for bonds, the interest rate is fixed as soon as you bought it and it won't increase or decrease. Below is the result how much you will get from the interest. Since generally there is no interest reinvestment for bonds, we can forget about the reinvestment scenario (the right portion). As you can see below, no surprise you earn a total of $4000 from the $10K investment in bonds in 20 years. Pretty miserable, isn't it?!

So how will we do with MSFT? The current MSFT dividend yield is also about 2% and if it can only pay this amount for 20 years, then nothing different indeed from bonds. But here comes with the sharp difference when we talk about quality dividend growth stocks. They don't pay static dividends year after year. Rather they grow their dividend payout year after year and for MSFT, actually its dividend annual compound growth rate is astonishingly 15% since it started to pay dividends 14 years ago. Don't believe me? Just check its dividend history that is easily available: it paid $0.24 in 2003 as the first dividend year and it paid $1.62 in 2017, a total of over 5 times increase in 14 years, or about 40% increase each year in average. So how our initial $10K will work out in 20 years, if we start with 2% dividend with a 15% annual growth rate? There are two scenarios:

• If you simply get the dividends without reinvestment (the left portion), you will get a total of over $23,500 earnings in 20 years, or almost 6 times better than the bonds above. In other words, after 20 years you will get about $33 per share per year as dividends ($3300 per year) for your initial $10K invested, or 33% yield. And you will continue to earn this and more if MSFT continues with its dividend hike as expected!
• Even much better if you reinvest your dividends; you will get a total of $77,200 dividends in 20 years, or almost 20 times more than the bonds. In this case, your total value of your investment is close to $90,000, a very close to a 10 bagger investment return without much effort on your side. All is realized via the dividend compounding magic!

That's why investing in high dividend growth stocks is the best way to beat inflation. You don't need the stock price to increase to make you rich. All you need to do is to buy and hold with dividend reinvestment and then you can go away to sleep and forget about it. In 20 years or longer, you suddenly find yourself sleeping on a gold mine! With this very safe long term strategy, it is even better to have the stock share price to decrease as long as the dividend is safe to grow. You will get much more money in the end as demonstrated here: Buffett's wisdom- why you should be happy to see your stock price go down. That's why I'm not really happy to see MSFT share prices double and triple in the past few years, although it makes you feel good. Shortsighted actually!




If you want to get some second opinion on MSFT, here is a good one to read: Is Microsoft Corporation (MSFT) Stock the Best Dividend in Tech? Here is the main conclusion from this author: MSFT stock has offered both explosive upside and also a rapidly growing dividend in recent years. So don't be intimidated by others laughing at you for liking MSFT's seemingly miserable dividend yield in less than 2% at the moment or any other quality dividend growth stocks for this matter. You should know better now how great it can be if you truly understand what I present here to you!!