The technology sector has always been the place investors go to for growth stocks. High-growth companies like Amazon.com (AMZN), Alphabet (GOOG), Netflix (NFLX), and many more have generated impressive returns to shareholders over the past several years, through rising share prices.

But the tech sector can also be a good source of dividend growth stocks. In the past several years, many tech companies have prioritized paying dividends to shareholders, and providing high rates of dividend increases each year.

Microsoft (MSFT) is a high-growth tech stock, and is a core holding of many institutional investors such as Melvin Capital, a registered investment advisor managing over $13 billion in assets. While Microsoft has a relatively low dividend yield of 1%, it makes up for this with rapid dividend increases, which makes it an appealing stock for investors looking for a mix of yield and growth.

Business Overview and Recent Events

Microsoft is a software giant with a market capitalization of $1.5 trillion. It is one of the largest companies in the world, and offers a diverse platform of products and services. Its core offering is its Windows operating system and related Office software. But it also has a sizeable gaming division under the Xbox brand, in addition to its LinkedIn subsidiary as well as its Surface hardware segment.

Despite the extreme economic uncertainty due to the coronavirus pandemic, Microsoft continues to generate growth even in a difficult climate. The company recently reported its financial results for the fiscal fourth quarter and full year. Revenue of $38 billion for the quarter increased 13% from the same quarter last year, and beat analyst estimates by $1.48 billion. Meanwhile, adjusted earnings-per-share came to $1.46, also beating expectations by $0.09 per share. Adjusted EPS increased 7% from the same quarter a year ago.

Among the company’s core segments, revenue in More Personal Computing increased 16% in constant currency to $12.9 billion. Revenue in Productivity and Business Processes increased 8% to $11.8 billion. Elsewhere, Xbox revenue increased by 68%, Surface revenue increased 30%, and LinkedIn revenue increased 11% for the quarter.

Microsoft has plenty of future growth left to deliver, thanks in large part to its booming cloud businesses.

Compelling Dividend Growth Potential

Microsoft has been a rewarding dividend growth stock over the past several years. The company has increased its dividend by approximately 15% per year over the past 10 years. This has coincided with Microsoft’s rapid sales and earnings growth in the past decade. Because the company is still registering impressive growth, shareholders can expect continued dividend growth in the years ahead. Rising income over time is one of the key factors separating quality dividend growth stocks versus bonds and other fixed income investments.

Future earnings and dividend growth are extremely likely, as the company is benefiting from a major trend, which is cloud computing. Cloud-based software offerings are reporting excellent growth, such as Office 365 which reported 22% growth in commercial sales. Revenue in Intelligent Cloud rose 19% in constant-currency to $13.4 billion.

Dynamics segment revenue increased 15% for the quarter, driven by 40% growth in cloud-based Dynamics 365. Finally, server products and cloud services increased 21% due to 50% growth in Azure revenue.

Microsoft has a 1% yield, which is below the S&P 500 Index average. But it makes up for this with a high rate of dividend growth. If the company continues to increase its dividend by 15% per year, shareholders buying at a 1% starting yield will generate a “yield on cost” of more than 4% in 10 years from now. As a result, dividend growth investors will still see a lot to like about Microsoft stock.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.