1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) tops our list of the best innovative stocks that pay dividends. The company invented Microsoft Windows, which is a computer operating system for use on personal computers (PCs). It was the first operating system to offer a graphical user interface (GUI) for IBM-compatible PCs, quickly becoming the dominant player in the PC market. Today, about 90 percent of PCs operate on some version of Windows. The company’s journey in innovation continues as it consistently introduces new and innovative products over the years. Annually, it allocates around 13 to 14 percent of its total revenue to research and development (R&D).
Microsoft Corporation (NASDAQ:MSFT) is seeing strong returns this year, with a surge of over 16% since the beginning of 2024. Additionally, its earnings are robust, attracting considerable interest from investors. In fiscal Q4 2024, the company reported revenue of $64.7 billion, which showed a significant growth of 15% from the same period last year. Its net income of $22 billion also increased by 10% YoY. The company’s impressive performance this fiscal year reflects both its innovation and the ongoing trust of customers. As a platform company, it is dedicated to addressing the crucial needs of its customers through its large-scale platforms while also aiming to lead in the era of AI.
The company’s AI segment was also highlighted by Fred Alger Management in its Q2 2024 investor letter. Here is what the firm said:
“Microsoft Corporation (NASDAQ:MSFT) is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”
Microsoft Corporation (NASDAQ:MSFT) is also a reliable dividend payer with a strong cash position. The company generated $37 billion in operating cash flow during the quarter, up from $29 billion in the prior-year period. It also paid $8.4 billion to shareholders through dividends and share repurchases. On September 17, the company declared a 10.7% hike in its quarterly dividend to $0.83 per share. This marked the company’s 19th consecutive year of dividend growth. The stock’s dividend yield came in at 0.70%, as of September 18.
Overall, Microsoft Corporation (NASDAQ:MSFT) ranks first on our list. While we acknowledge the potential for MSFT to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
