It’s not often that we use the terms “dividend stocks” and “tech stocks” in the same breath. Even less common is finding a Dividend Aristocrat in a pool of tech companies. Typically, Dividend Aristocrats, which are companies that have increased their dividends for at least 25 years, are in old economy sectors like industrials, healthcare, and consumer staples

Looking at the “Magnificent 7” group, none of the constituents has a continuous 25-year dividend streak and are instead quite frugal with dividends. For instance, Tesla (TSLA) and Amazon (AMZN) don’t pay dividends at all, while Meta Platforms (META) and Alphabet (GOOG) only initiated payments in 2024.

Among the lauded group, Microsoft (MSFT) stands out with its dividends. It initiated a dividend in early 2003, which was shortly after the dot-com bust. “Declaring a dividend demonstrates the board’s confidence in the company’s long-term growth opportunities and financial strength,” said the company while announcing its first dividend at the time.

Microsoft Has the Highest Dividend Yield Among the Magnificent 7 Stocks

Microsoft has a yield of just under 1%, which, while below what an average S&P 500 Index ($SPX) constituent pays, is much better than most other Big Tech companies. Moreover, its quarterly dividend has grown over 10-fold since 2003 at a healthy compound annual growth rate (CAGR) of around 11%.

While Microsoft is not yet a Dividend Aristocrat, it is a strong contender to become one. Its annual dividends – based on the calendar year and not its fiscal years – have risen for 23 years. 

Meanwhile, Microsoft’s relatively high dividend yield is just the cherry on top, and it is also a defensive play amid the current macroeconomic environment. 

Microsoft Is a Defensive Bet

While no business is immune to the economic slowdown or a recession, Microsoft looks to be the best-placed among its Magnificent 7 peers. Microsoft also happens to be the best-performing Magnificent 7 stock this year and has fallen the least among the group, even though it is still down more than 14% in the year to date.

What Makes Microsoft Stock a Buy?

Microsoft’s valuations look quite reasonable at these levels. The stock trades at a forward price-earnings (P/E) multiple of 28.5x while the forward price-cash-flow multiple is 25x. While the artificial intelligence (AI)-driven euphoria and the corresponding expansion in multiples have subsided, I find Microsoft’s risk-return attractive here.

The company’s revenue stream is diversified and spread across the core Windows and Office franchises, premium subscription products, advertising, cloud, gaming, and LinkedIn. Microsoft is less cyclical than its Magnificent 7 peers and has more consistent cash flows, making it a defensive play.

The company has also apparently scaled back on its aggressive data center expansion. Many have warned that data center capacity has run ahead of demand, and by preemptively dialing back on some investments, Microsoft seems to have taken the correct approach.

In a LinkedIn post earlier this month, Microsoft’s Head of Cloud Operations Noelle Walsh acknowledged that the company is “slowing or pausing some early-stage projects.” She, however, emphasized, “While we may strategically pace our plans, we will continue to grow strongly and allocate investments that stay aligned with business priorities and customer demand.”

Over the medium to long term, OpenAI – in which Microsoft has invested nearly $14 billion – should start contributing positively to its earnings. AI technology is here to stay and further advancements will boost adoption of AI products and services, including those Microsoft is offering.

MSFT Stock Forecast

Sell-side analysts are quite upbeat on Microsoft, and it has 37 “Strong Buy,” four “Moderate Buy,” and four “Hold” ratings. The stock’s mean target price of $496.10 is 37% higher than current prices, while the Street-high target price of $600 is over 66% higher.

Overall, I believe Microsoft brings the best of two worlds to the table. If the trade war escalates and broader markets fall, MSFT could outperform given its defensive nature. On the upside, reasonable valuations and the AI pivot could bring in decent capital gains over the next couple of years.