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Microsoft has increased its quarterly dividend by 8% to $0.98, buoyed by an impressive annual free cash flow of $67 billion. Meanwhile, Broadcom saw its AI revenue nearly triple, supporting its own payout.
Costco has consistently raised its quarterly dividend since 2005 and has issued five special dividends, the latest being $15 per share in December 2023.
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Investors gravitate towards the Nasdaq-100 for its growth potential, but it’s worth noting that many companies within that group return little to shareholders. Hidden within the growth narrative is a segment focused on genuine income, supported by strong cash generation. In its latest fiscal year, Microsoft alone generated $66.99 billion in free cash flow. Alongside Microsoft, Broadcom and Costco are also noted in the most recently confirmed holdings of the Nasdaq-100 tracker, each maintaining a regular quarterly dividend. However, it’s clear there’s a trade-off: yields are modest, meaning investors are buying into strength and potential for future dividend growth while accepting a smaller current payout.
Microsoft: A Fresh Raise Funded by a Cash Machine
Microsoft offers about a 0.69% yield at a share price of $516.17, which isn’t very substantial as current income goes. The recent change is in its payout, with the board declaring a quarterly dividend of $0.98 per share, up from $0.91, and set to be paid on December 10 to shareholders on record by November 19. This raises the annual forward dividend to $3.92 per share.
Dividend safety: The coverage here is quite robust. Over the last 12 months, Microsoft paid out $3.64 per share in dividends against diluted earnings of $17.97 per share. For the entire fiscal year, operating cash flow hit $182.94 billion, and free cash flow was $66.99 billion, even after significant capital spending of $115.95 billion. The company’s financial health is evident in its debt-to-equity ratio of 0.291, net debt to EBITDA of 0.557, and an interest coverage ratio of 50.88x.
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Track record:
The dividend history shows quarterly payments dating back to 2003. The recent trend has seen quarterly payouts rise annually, starting from $0.51 in 2020, and evolving through several increments to the current $0.98. This indicates a solid upward trajectory.
Bull case: Microsoft’s strong revenue momentum is continuing. For the full year, revenue grew by 17.79% to $331.84 billion, while net income surged by 31.34% to $133.75 billion. Their Azure business crossed $100 billion in annual revenue, and the Microsoft 365 Copilot service now boasts over 30 million paid subscriptions. The company’s remaining performance obligations, which signal future cash flow, surged to $678 billion, marking an 84% increase. Currently, the stock trades at about 29 times trailing earnings and 25 times anticipated earnings.
Risk: The spending for AI development is impacting free cash flow. Capital expenditure in the fourth quarter soared by 109.6% to $35.80 billion, leading to a 23.2% decline in quarterly free cash flow. If capital expenditures continue to outpace operating cash flow, it could limit future dividend hikes, even though current payouts remain well-supported.
Broadcom: AI Cash Flow Gives the Payout Deep Cover
Broadcom’s yield stands at 0.73% with shares priced at $352.81. Its quarterly dividend of $0.65 is scheduled for September 30, with an annualized forward dividend of $2.60.
Dividend safety: Broadcom is experiencing a significant surge in cash generation. In its fiscal third quarter, operating cash flow leapt 98% to $14.20 billion, while capital spending was a modest $532 million. Free cash flow grew impressively by 94.55% to $13.67 billion, representing 46% of revenue. The company’s cash reserves reached $23.98 billion. Additionally, the annual dividend stands in contrast to trailing diluted EPS of $7.74. Broadcom also managed to allocate $600 million for stock buybacks in its second fiscal quarter.
Track record: The company has maintained a dividend payment history since 2010. Recent increases have raised the quarterly payout from $0.53 to $0.65, with the most recent declaration expected to happen at year-end.
Bull case: The demand for AI is providing Broadcom with excellent foresight. In the third fiscal quarter, revenue surged by 85.5% to $29.59 billion, with AI semiconductor revenue skyrocketing to $16.7 billion—a staggering 221% increase. Management forecasts fourth-quarter revenue at about $34.8 billion, with AI semiconductor revenue expected to reach $21.7 billion. Analysts express optimism, backing the stock heavily with strong buy ratings and a consensus target of $531.85.
Risk: A significant portion of Broadcom’s AI revenue is reliant on a small yet crucial number of hyperscale clients. If their order trends revert to typical patterns, the revenue spike could moderate, which in turn might affect dividend growth.
Costco: Reliable Raises With Occasional Special Payouts
Costco has a yield of 0.59% at a share price of $922.77, which is the lowest among these companies. Its regular quarterly dividend is $1.47, rising from $1.30, marking an annualized forward dividend of $5.88. Over the past year, it paid out $5.54.
Dividend safety: Costco recently wrapped up its fiscal year with operating cash flow reported at $15.83 billion, an increase of 18.67%. It also enjoyed free cash flow of $9.39 billion, up 19.82%, and $6.44 billion in capital spending. Their cash reserves are at $20.21 billion, with membership fees contributing significantly—reaching $1.85 billion in Q4. They currently boast 150.4 million members and a renewal rate of about 89.8%, with executive members accounting for a substantial portion of sales, making their dividend so dependable.
Track record: Costco has maintained an unwavering record of raising its quarterly dividend since 2005. Payouts have increased consistently, from $0.10 back then to $1.47 today, with notable interim special dividends also being distributed.
Bull case: The company continues to expand; its latest quarterly revenue was up by 11.1% to $95.72 billion, with comparable sales rising by 9.4%. Their digitally enabled comparable sales even increased by 19.5%, reflecting a robust business trajectory. Costco plans to open about 28 new warehouses this fiscal year, contributing further membership income to sustain these payouts. Interestingly, even as free cash flow grows, shares have dipped by 1.61% over the past year.
Risk: With a relatively small base yield, a large part of Costco’s income allure hinges on special dividends, which can be unpredictably timed. It’s advisable to focus on the regular payments and view any additional special dividends as a nice bonus.
How the Three Payouts Stack Up
Why This Income Cohort Deserves a Closer Look
Microsoft, Broadcom, and Costco all currently offer modest yields, but each is backed by robust free cash flow and a history of dividend increases. Microsoft stands out for its annual raise consistency, while Broadcom is noted for its rapidly growing cash generation, and Costco offers a reliable quarterly dividend complemented by occasional special distributions. This segment is particularly attractive for income investors looking to reap benefits while engaging with the Nasdaq-100.
