Today I bought shares of Microsoft (MSFT), the world's largest software maker. This is my second purchase of MSFT, with the first purchase occurring in January. For reasons discussed in my earlier post, I still consider MSFT to be undervalued by at least 20%, so I decided to take advantage of the opportunity in front of me and increase my position.
I bought 60 shares of MSFT at the price of $27.45 per share, giving me a 3.34% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $13.80, which will add a total of $55.20 to my annual dividend income. The stock went ex-dividend earlier this week, so I will not receive the next dividend payment, but the lower cost basis -- relative to where the stock was trading the day before the ex-dividend date -- more than compensates for the missed dividend. This purchase was made in my Roth IRA, so dividends and capital gains will not be taxed. When the positions in my taxable account and Roth IRA are considered together, I now have 115 shares of MSFT and will receive combined quarterly dividends of $26.45. My forward 12-month dividend total is now $2,278.
MSFT is the first stock in my Roth IRA, where I require a minimum dividend yield of 3%. The purchase used about one-third of the cash in that account, so I have cash remaining for two more similar-sized purchases. The broad market decline during the past two days has created some buying opportunities that are tempting me, so I might make another purchase soon. Even though INTC had a nice drop today, I do not plan to buy more tech stocks for a while, given that my MSFT and INTC positions together make up 9% of my portfolio. However, I am confident that I can find good opportunities in other sectors.
Interesting purchase on MSFT. Certainly value there, and one of the stronger opportunities on the market right now if you believe in the long-term story. I keep circling this one. I'm just unsure, and am concerned most about (lack of) innovation. Certainly they have some cash cow businesses like MS Office and the like, and I really like the new Surface. I've heard of some issues already with Windows 8, specifically on the tablets...but that's not really surprising as this is all new territory. It's one I continue to watch as I ebb and flow in and out of interest.
VOD is one I'm watching right now. Like I said in your last post I feel pretty fully invested in it, but there's value there. The potential acquisition of Kabel Deutschland could provide a nice fit as Vodafone continues to explore packaging fixed line cable/internet/wireless bundles as a way to fight the low cost wireless providers and increase revenue. However, the recent "open mindedness" of exiting the 45% stake in Verizon Wireless is troubling as I feel that's the brightest star in VOD's universe right now.
I'm also currently looking some Canadian stuff.
DM: Thanks for your comment. I've read a lot of mixed reviews about Microsoft and various aspects of its business, including its innovation efforts and new products. However, when I drill down to the fundamentals, I see a stable business that continues to grow its revenues, earnings, and dividends, backed by tremendous free cash flow. The company also has an excellent balance sheet and benefits from a diverse mix of products and services. Of course, innovation is always a concern when it comes to tech companies, and Microsoft is no exception, but I view it as less risky than a company such as Apple, which is faced with the pressure of coming out with a new, game-changing product every few years. Time will tell whether Microsoft turns out to be a good long-term investment for me, but I think the risk/reward ratio is in my favor.Delete
As for Vodafone, I agree that it has some value right now. Headwinds from southern Europe will likely persist for another year, but that might be offset from continued growth in emerging markets. I also hope they do not sell their stake in Verizon Wireless, which is a nice gem among their businesses.
Regarding Canadian stuff, I'm guessing you're looking at the Canadian banks. I've examined them in the past, and I generally agree with the sentiment expressed by others that they are good investments relative to other financial stocks. However, I haven't taken the time to investigate them closely enough to give serious investment consideration.
In regards to the Win 8 issues, if I remember correctly they just kind of rolled it out knowing that it wasn't the finished product with the expectation to send out updates along the way to fix the issues. Of course that's standard operating procedure with MSFT.Delete
For all the reasons you mentioned MSFT should be a great investment. Once I build up the portfolio a little bit more I wouldn't mind starting a position in the other half of Wintel to go with my INTC shares.
PIP: Thanks for your comment. You make a good point -- it could take a while for Microsoft's newest products to meet a finished standard that makes them more appealing.Delete
I think MSFT will supply you with dividends for years to come. It will serve its purpose. I have a suspicion it will take a long time (if ever) to reach full valuation. Just a hunch, the distributions will be strong either way!ReplyDelete
Yeah I think I'm about teched out too, I don't like headaches. I would add ADP but it needs to drop significantly.
Interesting that you require 3% in your ROTH, why is that? I use my ROTH in certain situations like Canadian stocks to avoid withholding taxes, unqualified REIT dividends, unqualified preferred stock dividends, and eventually bond interest. I try to keep all the unqal dividends in my ROTH to minimize Uncle Sam's cut. My income is fairly low, I might be wasting my time!
CI: Thanks for your comment. I agree that it could take a long time for Mr. Market to reappraise Microsoft and give its stock a more appropriate valuation. However, I don't mind waiting and collecting a growing dividend.Delete
I also like ADP, but it rarely seems to trade at an attractive valuation. Like you, I would need to see a significant drop before I would consider starting a position.
As for why I require a minimum 3% yield in my Roth IRA, it is mainly because I would like to take advantage of the tax-free status given to dividends in that account. For that reason, it makes more sense to have higher-yielding stocks in my Roth than in my taxable account (where my minimum yield is 2%). Also, I am thinking about adding a REIT to my portfolio at some point in the future, and as you mention, a Roth is well-suited for unqualified REIT dividends.
I think you made a good buy here of MSFT. I purchased it late last year and really believe the company will do well going forward. Like you said the revenues, earnings and fundamentals are strong. As far as innovation, I like you am not that concerned. I feel like they have a strong enough business that has been doing pretty good over the past few years without experiencing the kind of innovation and great products that AAPL has been pushing out. They keep chugging along with their core competencies and any great products that boost sales and income (such as hopefully the surface and windows 8) will be icing on the cake in my opinion! Good Luck and hope this investment does well for all of us!ReplyDelete
Dan Mac: Thanks, I agree on all points and I also hope MSFT turns out to be a good investment for us!Delete
Microsoft is a very good company. Their are some lesser known names in the technology area that are also worth a closer look.ReplyDelete
QS: I agree that Microsoft is a good company. I haven't delved too much into lesser known tech names, mainly because I don't intend to make tech a large proportion of my portfolio.Delete