Key Points
Microsoft has established itself as a leader in AI.
The company's business is built to handle challenging times.
It also offers something many retirees love: A strong dividend program.
Retirees tend to prioritize relatively stable, reliable investments that also provide consistent income. That hardly describes the top artificial intelligence (AI) companies, many of which are growth-oriented tech stocks that are fairly volatile and whose dividend programs (even when they have one) aren't particularly impressive. That said, there is one AI stock that stands out above the rest as the most attractive for retirees. That's none other than Microsoft (NASDAQ: MSFT). Here is why.
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Growth and income rolled into one
First, let's discuss several of the reasons Microsoft is a leading AI company. The tech leader offers a host of AI services through its Azure platform, including tools that enable corporations to build custom AI tools without the expensive investment required to train AI models from scratch. It also helps that Microsoft already has a large distribution channel in place. Microsoft has been an integral part of the day-to-day activities of millions of businesses for decades through its operating systems (OS) and productivity platforms. It's not a leap for the company to rely on these existing relationships to advance its AI agenda.
Then there is Microsoft's integration of AI tools into its OS via Copilot, as well as its partnership with OpenAI, which remains a market leader. Beyond its AI business, though, Microsoft's large, established base of customers who use its OS and productivity tools daily -- as well as its cloud computing services -- provides it with a significant source of predictable revenue, much of it from enterprise contracts, resulting in recurring sales. This is precisely what makes Microsoft a better pick for retirees than some other AI leaders that rely on advertising or e-commerce, businesses that suffer meaningfully during recessions.
Microsoft won't escape an economic downturn completely unaffected. Hardly any company can pull that off. But the tech giant should navigate one better than most of its similarly sized tech peers. Then there is Microsoft's excellent dividend program. Despite the company's low yield of about 1% (the S&P 500's average is 1.2%), Microsoft regularly increases its payouts, having done so by 153% over the past decade.
Microsoft is unlikely to cut its dividend given the amount of free cash flow it generates -- $77.4 billion over the trailing-12-month period -- and its highly conservative cash payout ratio of 33.6%. With all that said, how should retiree investors approach Microsoft stock? Despite its strengths, the tech giant can be volatile, as evidenced by its significant decline in market value over the past six months. However, given its robust underlying business and growth prospects driven by cloud computing and AI, it should eventually bounce back while maintaining its dividend program intact. Retirees looking for some exposure to the AI industry may allocate a (very) small portion of their portfolios to Microsoft.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.