What Microsoft actually does

Microsoft started in 1975 selling programming tools for early personal computers and rose to dominance with MS-DOS and Windows. Today it is best understood as three businesses in one: productivity software (Microsoft 365, Teams, LinkedIn), cloud infrastructure (Azure and server products) and personal computing (Windows, Surface, Xbox and gaming).

The shift from selling software licences to selling subscriptions changed the company. Revenue became more predictable, and the business customers who rely on its tools rarely switch.

How the business makes money

The largest growth driver is Azure, the cloud platform that companies rent instead of running their own servers. Around it sit recurring subscriptions to Microsoft 365, Dynamics business software and security products. Gaming and Windows add steady but slower-growing revenue.

Artificial intelligence is now woven into most of these products, and Microsoft has spent heavily on data-centre capacity to support it. That spending is the main thing separating its recent years from its earlier, lighter-capex phase.

The dividend story

Microsoft paid its first dividend in 2003 and has increased it regularly since. The yield is modest, because the share price has risen so much, but the growth is the point: it is the textbook example of a company that pairs a small payout with strong earnings growth.

Microsoft is also one of only two US companies, along with Johnson & Johnson, with the top AAA credit rating from S&P Global, which says a lot about the strength of its balance sheet.

What to keep an eye on

  • Cloud competition. Amazon and Google fight hard for the same customers.
  • Heavy AI investment. Large spending needs to turn into revenue to justify itself.
  • Regulation. Size and bundling practices attract attention from competition authorities.
  • Valuation. Quality is widely recognised, which is already reflected in the price.

Quick take

Microsoft combines recurring revenue, a pristine balance sheet and a growing dividend. It will never top a high-yield screen, but it is a good case study in how dividend growth and business growth can work together over decades.