Microsoft ($MSFT) investors are about to be rewarded. On September 16, the company announced that it will increase its dividend payments by 10%, from $0.75 per share to $0.83. This is consistent with the company’s past practices, as it has increased dividends regularly for the past 10 years. At the same time, the company announced an upcoming $60 billion share buyback. This will likely generate a modest increase in the company’s stock price.

Here’s what this means for Microsoft investors. And to stay up to date on news that may impact Microsoft and other potential investments, sign up for the Market Minute newsletter.

Dividends and Buybacks Explained

Dividends are a form of profit sharing for corporate shareholders. When a company issues dividends, it makes a direct payment to each shareholder on a per-share basis. So, for example, in the case of Microsoft this means that the company will directly pay $0.83 to each shareholder for each share of the company’s stock they own. An investor who owns 1,000 shares, then, would receive a check for $830.

A company is not legally obligated to make or continue dividend payments, although a firm can impose this requirement on itself through a corporate charter or other contract. The amount, timing and continuation of dividend payments are otherwise entirely at the company’s discretion. That said, many firms make a regular practice of issuing dividends in order to encourage investment. Payment schedules are at the discretion of the company. Many companies, including Microsoft, issue their dividends on a quarterly basis.

Buybacks are when a company purchases its own stock. It can do this from the public market at large or through specific deals with institutional investors. By repurchasing its own stock, a company reduces the available share of equity available to third parties. This may allow the company to have more flexibility by mitigating risks including hostile takeovers and investor activism.

A buyback also gives the company more opportunity to generate capital through investment. By purchasing its own stock, the company now holds more of its own equity that it can later sell to investors, ideally if the company’s share price has increased. (Here, it’s important to remember that stock sales on the open market are almost always between investors. This secondary market does not directly generate any capital for the underlying company. A firm only generates capital when it sells its own shares directly.)

Consider speaking with a financial advisor if you need help determining evaluating the role of dividends and stock buybacks in your investment strategy.

Dividend Increases: Impact on Investors

The new dividend will be distributed quarterly starting on December 12, 2024, to shareholders registered by November 21, 2024. For investors, Microsoft’s increased dividend will likely have a couple of impacts.

First, this is likely to increase the price of Microsoft stock modestly. A higher dividend makes the stock more valuable, since it means that shareholders will receive larger payments. That said, this isn’t likely to have an outsized effect on the company’s stock. Microsoft has issued a roughly 10% increase every year since 2013, so this past practice will already be baked into the share price to some degree.

Second, and more directly, this will mean a windfall for current and future shareholders. Anyone who owns Microsoft stock receives quarterly dividend payments. Those payments will now increase by 10%. This significantly outstrips inflation, making their shares more valuable both in terms of on-paper value and spending power. Unfortunately, since dividends are taxed as ordinary income, this will also mean higher income taxes for 2024, since the first $0.83 payments will be issued in November, 2024.

Buyback: Impact on Investors

For investors, the main impact of a buyback will be a likely, modest increase in share prices.

With a stock buyback, a company makes a large purchase of its own stock. In this case, Microsoft plans to purchase up to $60 billion worth of shares, or around 1.8% of its market cap. ($60 billion / $3.2 trillion) This will in theory increase demand for the stock while also reducing the supply of shares on the market, both of which typically have the effect of increasing the stock price.

The impact of buyback programs can range. Research has historically found that a buyback will increase a company’s share price by between 2% and 12% in the short term. For this reason, buybacks were historically illegal, as the SEC considered them a form of market manipulation. This rule was rolled back in the early 1980s, and today S&P 500 companies dedicate roughly half of their profits to buyback programs.

However, this average impact tends to break down into two categories. Historical research has found that value stocks, companies generally undervalued by the market, have an outsized reaction to buyback programs, sometimes posting average price increases up to 45%. For well-known companies, where undervaluation is unlikely, price impacts tend to be minor, if significantly noticeable at all.

What’s more, the sustained impact on investors is often smaller than it may seem. While stock buybacks are associated with short-term price increases, as noted above those increases can range widely. More importantly, any noticeable price increase from a one-time buyback is usually transitory. As researchers have found, it typically “dissipates completely over the subsequent month.” In order to see a sustained, significant price increase, a company may need to engage in a sustained program of repeated buybacks over a period of several years.

The upshot is that, for individual investors, Microsoft’s buyback program may increase the value of their shares. However, based on historic market performance, that price increase is unlikely to be significant and will most likely be transitory unless it is part of an ongoing program of buybacks over the coming 12 to 24 months. That said, the company intends to purchase a very significant portion of its total market value, which may generate a larger-than-usual impact on the market overall. All investments involve risk. Consider speaking about your investment strategy with a financial advisor.

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The Bottom Line

Microsoft has announced both increased dividends and a $60 billion share buyback. For investors, this is likely to be a windfall, although the gains will likely come primarily from the dividend payments.

Tips on Dividend Investing

Dividend investing is part of what’s called “income investing.” This is when you build a portfolio that generates regular payments just for holding the underlying assets, rather than a portfolio that requires selling your assets for capital gains. This can be an extremely effective way of building a sustainable retirement fund, although it’s not without risks. Here’s how to think about it.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. This article IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO PROVIDE LEGAL ADVICE, TAX ADVICE, ACCOUNTING ADVICE OR FINANCIAL ADVICE. Before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisers who are fully aware of your individual circumstances. SmartAsset’s services are limited to referring users to third party advisers registered or chartered as fiduciaries (“Adviser(s)”) with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.