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Microsoft Corporation (MSFT) Attracts 279 Hedge Funds Amidst Strong AI Growth and Dividend Hike

We recently published a list of 10 Best Innovative Stocks that Pay Dividends. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other best innovative stocks that pay dividends. Innovation plays a crucial role in today’s market. With the significant attention tech stocks have gained over […] Read More...

We recently published a list of 10 Best Innovative Stocks that Pay Dividends. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other best innovative stocks that pay dividends.

Innovation plays a crucial role in today’s market. With the significant attention tech stocks have gained over the past year, it’s clear where investors are directing their funds. Tech firms are leveraging disruptive technologies like artificial intelligence to process vast, complex datasets. In the healthcare sector, advancements in research and development (R&D) have led to life-saving drug therapies and treatments. Meanwhile, the growing impact of climate change is pushing energy and utility companies to prioritize renewable energy sources. Therefore, innovation lies at the heart of every industry today.

Businesses in the US and globally swiftly recognized the influence of innovation on their growth and operations, and they are gradually shaping their activities around it. A recent McKinsey survey of over 1,000 executives revealed that companies with a strong culture of innovation are twice as successful as some of their peers in scaling digital transformations. These innovative firms focus on technologies and changes to their operating models that promote rapid learning and adaptation—essential components of innovation. The report also highlighted that 14 of the top 20 global companies have leveraged innovation to either expand existing markets or create entirely new ones.

Read also: Top 18 Automotive Industry Innovations and Trends

A key component of innovation is R&D, which focuses on systematic and scientific investigation to create new products, technologies, or processes. Through R&D investments, companies can strengthen their abilities, explore fresh ideas, and discover innovative solutions to address customer demands. Businesses worldwide, particularly in the pharmaceutical sector, have boosted their R&D investments to develop new products that meet the demands of their customers. Financial Times reported that R&D in the US has grown in recent decades, increasing from 2.2% of GDP in the 1980s to 3.4% in 2021. This rise is mainly due to the private sector’s contribution, which doubled to 2.5% of GDP. Moreover, the percentage of the population involved in patent creation almost doubled during this time.

It’s not just established companies that are embracing innovation in their operations; the rise of US startups also reflects this trend, as they introduce groundbreaking business ideas previously unheard of. Economist John Haltiwanger found that Americans were starting new businesses at an unprecedented rate. And he’s not mistaken. In 2020, more new businesses were launched than in any previous year, with 2021 following closely behind. According to the Kauffman Indicators of Entrepreneurship, the one-year survival rate for these startups exceeded 80% in 2021, marking the highest rate since 1999. Haltiwanger noted that a surge in new businesses is a strong indicator of job creation, innovation, and productivity growth within the economy. He further said that startup booms not only reflect technological innovation but also significantly drive it. Startups explore how to leverage new technologies, experiment with them, and create new products, pushing competitors to adapt and innovate in response. Research from Texas McCombs, which examined 6,116 patents from the mid-1970s to 2016, highlighted the impact of startups on innovation. The study found that patents from startups were cited 8.5% more each year and 21% more over a nine-year period compared to patents from established companies.

Our Methodology:

For this article, we scanned Insider Monkey’s database of 912 hedge funds as of Q2 2024 and picked companies that actively prioritize and promote the development of new and groundbreaking ideas, products, services, or business processes. From that list, we picked 10 stocks with the highest number of hedge fund investors and ranked them in ascending order of hedge funds’ sentiment towards them. These companies belong to different sectors, including healthcare, technology, aerospace, and defense.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A development team working together to create the next version of Windows.

Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders: 279

Microsoft Corporation (NASDAQ:MSFT) tops our list of the best innovative stocks that pay dividends. The company invented Microsoft Windows, which is a computer operating system for use on personal computers (PCs). It was the first operating system to offer a graphical user interface (GUI) for IBM-compatible PCs, quickly becoming the dominant player in the PC market. Today, about 90 percent of PCs operate on some version of Windows. The company’s journey in innovation continues as it consistently introduces new and innovative products over the years. Annually, it allocates around 13 to 14 percent of its total revenue to research and development (R&D).

Microsoft Corporation (NASDAQ:MSFT) is seeing strong returns this year, with a surge of over 16% since the beginning of 2024. Additionally, its earnings are robust, attracting considerable interest from investors. In fiscal Q4 2024, the company reported revenue of $64.7 billion, which showed a significant growth of 15% from the same period last year. Its net income of $22 billion also increased by 10% YoY. The company’s impressive performance this fiscal year reflects both its innovation and the ongoing trust of customers. As a platform company, it is dedicated to addressing the crucial needs of its customers through its large-scale platforms while also aiming to lead in the era of AI.

The company’s AI segment was also highlighted by Fred Alger Management in its Q2 2024 investor letter. Here is what the firm said:

“Microsoft Corporation (NASDAQ:MSFT) is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”

Microsoft Corporation (NASDAQ:MSFT) is also a reliable dividend payer with a strong cash position. The company generated $37 billion in operating cash flow during the quarter, up from $29 billion in the prior-year period. It also paid $8.4 billion to shareholders through dividends and share repurchases. On September 17, the company declared a 10.7% hike in its quarterly dividend to $0.83 per share. This marked the company’s 19th consecutive year of dividend growth. The stock’s dividend yield came in at 0.70%, as of September 18.

Overall, MSFT ranks 1st on our list of best innovative stocks that pay dividends. While we acknowledge the potential for MSFT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. 

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.

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