These Dividend Stocks Just Gave Their Investors a Raise. Here's Why That's a Big Deal.

Tech titan Microsoft (NASDAQ: MSFT) recently increased its dividend by another 11%. That new rate will cost it about $25 billion annually. It will likely keep the company near the top of the pack among global-dividend payers.

Microsoft wasn't the only company that recently gave its investors a raise. Telecom giant Verizon (NYSE: VZ) increased its payment by less than 2%, while leading real estate investment trust (REIT) Realty Income (NYSE: O) provided an even more modest pay bump.

While Microsoft's pay raise made headlines due to its size, what's even more important is the consistency with which these companies have raised their payouts (more than a decade apiece). That's because dividend growers have historically delivered the highest-total returns.

The data on dividends

Hartford Funds and Ned Davis Research have analyzed the returns of stocks by their dividend policy going back 50 years. They found that the average-dividend payer has delivered a 9.2% average-annualized total return with lower volatility (0.94 beta) compared to the average member of the S&P 500 (the equal-weighted S&P 500 index has delivered a 7.7% average-annualized total return with a beta of 1.0). That's due to the much lower returns of dividend non-payers (4.3% with a beta of 1.18).

However, not all dividend stocks are equal. Dividend growers and initiators are driving the returns:

Data source: Hartford Funds and Ned Davis Research.

That data makes it abundantly clear that dividend growth is a key driver of a stock's outperformance. Even better, investors get those higher returns with less risk (as measured by the lower beta).

Great dividend-growth stocks

Microsoft has done a terrific job of growing its dividend. It has increased its payout at a double-digit annual clip over the past decade. Meanwhile, its growth streak is up to 20 years. Unsurprisingly, Microsoft has delivered robust total returns during that period (more than 16% annualized compared to 11% for the S&P 500).

The tech titan should have no trouble continuing to increase its payout. It generates an enormous amount of cash each year (analysts expect it will produce $81 billion in free cash flow next year). That will easily cover its projected-dividend outlay ($25 billion), leaving it ample excess to fund growth and repurchase shares (it recently unveiled a new $60 billion repurchase program). Meanwhile, Microsoft has a cash-rich balance sheet with minimal net debt. The company is also growing at a healthy rate, powered by its investments in cloud computing and artificial intelligence (AI).