Microsoft (NASDAQ: MSFT) is the second-most valuable company in the world, has rewarded long-term shareholders with monster gains, and has been one of the leading players in two revolutionary trends -- cloud infrastructure and integrating artificial intelligence (AI) into software. So it's not necessarily a company that needs interest rates to be lower to thrive.
However, lower interest rates could help Microsoft in a variety of ways. Here's why it stands out as my top growth stock to buy now.
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Accelerating growth
Microsoft has made a number of multibillion-dollar acquisitions . It completed its $69 billion acquisition of Activision Blizzard in October 2023, bought GitHub in 2018, and LinkedIn in 2016, among others. It also has invested an estimated $13 billion in OpenAI , which has been instrumental in helping Microsoft quickly integrate generative AI across its business, from cloud infrastructure, to Copilot for the Office 365 suite, to GitHub.
Its capital expenditures have exploded higher in recent years, but research and development expenses have grown at a lower rate than revenue. Lower interest rates will reduce borrowing costs and allow Microsoft to accelerate growth organically or through acquisitions. Unlike some conglomerates, Microsoft doesn't rely solely on buying out the competition to grow. It is a highly innovative company whose best breakthroughs come from within the company. It has used acquisitions as an added jolt rather than its primary power source.
Microsoft rewards its shareholders
Lower interest rates allow companies to refinance debt and lower their interest expenses. Fortunately for Microsoft, it has more cash, cash equivalents, and marketable securities than debt on its balance sheet , which leaves room to return value to shareholders.
On Sept. 16, Microsoft announced a 10% increase to its dividend -- boosting the quarterly payout to $0.83 per share. It also announced a new share repurchase program for up to $60 billion in buybacks . It's worth understanding that the repurchase program doesn't mean that Microsoft plans on buying back $60 billion of stock in a year, but rather that the board has authorized Microsoft to buy up to that much -- which it will likely do over multiple years. For context, Microsoft spent $15.3 billion on buybacks and $21.8 billion on dividends in its last fiscal year.
Even when factoring in the dividend raise, Microsoft's yield is just 0.8%. The low yield is due to the strong performing stock price, not a lack of raises (the stock is up threefold in five years). In fact, Microsoft has increased its dividend every year since fiscal 2011. Its dividend has doubled in the last six years and more than tripled in the last 10 years.
A runway for future dividend raises
Microsoft has undergone several transformations over its nearly 50-year history. But right now, it may be undergoing the greatest transformation yet -- at least from an investment perspective.
Microsoft has never had this many growth opportunities -- from legacy business units in consumer and enterprise software, to cloud, to AI, and more. And yet, it still has plenty of cash left to support one of the world's largest capital return programs without jeopardizing the health of its balance sheet.
Microsoft has become a well-rounded dividend growth stock that can reward investors even if the stock price languishes. If Microsoft continues raising its dividend at around 10% per year, the yield will go up if the stock prices increase by less. And if the stock price goes up by more than 10%, investors will likely be pleased with the capital gains and will not mind a lower yield.
It's also worth understanding the difference between yield and yield on cost. If you buy a share of Microsoft today, the yield is 0.8% (the current dividend divided by the current stock price). But investors who bought Microsoft for 3 times less five years ago have a yield on cost of 2.4% -- or 3 times the current yield.
This is a concept that Warren Buffett has discussed at multiple Berkshire Hathaway annual shareholder meetings -- often through the lens of Coca-Cola and American Express -- which Berkshire bought decades ago . Both companies have gone up by so much since then (while also steadily increasing their dividend payouts) that Berkshire has made significantly more on dividends over the years than it paid for the investments in the first place.
So if Microsoft's dividend doubles again over the next six years, investors who buy the stock today will have a yield on cost double the current yield, not to mention potential gains from a higher stock price.
Microsoft deserves to be at an all-time high
Microsoft stands out as a well-rounded investment that is on its way toward becoming a passive income powerhouse thanks to consistent and sizable dividend raises. Its valuation is higher than historical levels, but the company is arguably a higher-quality company today than even a few years ago -- which is why it deserves a premium valuation.
Buying a stock around an all-time high is never easy, but Microsoft has what it takes to enter a new growth gear in the coming years. Investors should be on the lookout for how the company balances its capital spending and internal investments and whether it decides to make a splashy acquisition. The right moves could fuel an already red-hot growth story and set the stage for sustained gains for patient investors.
Should you invest $1,000 in Microsoft right now?
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American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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