Investors are increasingly drawn to certain stocks as the S&P 500 Index’s dividend yield approaches historic lows last seen during the dot-com era. Notably, Microsoft (MSFT) has emerged as a compelling option, despite recent fluctuations in its stock price. The current market environment has ignited comparisons to the late 1990s, particularly in relation to the surge in artificial intelligence (AI) investments. Prominent figures, such as investor Michael Burry, have voiced concerns about an “AI bubble” reminiscent of the dot-com period.
Recent data reveals that the S&P 500’s dividend yield is nearing 1%, a significant drop compared to its historical averages. This decline has prompted many analysts to scrutinize stocks like Microsoft, which, while boasting a dividend yield of 0.77%, remains below historical norms. The company has been recognized for its consistent dividend growth since 2003, positioning it on the cusp of becoming a Dividend Aristocrat. However, the rapid appreciation of its stock price has overshadowed dividend increases, leading to a lower yield.
Despite a strong first half of 2023, Microsoft shares have experienced a downturn of over 7% in the past three months, with a drawdown exceeding 16% from its peak earlier this year. This decline followed a fiscal Q1 2026 earnings report that surpassed expectations in both revenue and profit. Yet, the company signaled that its capital expenditures (capex) would grow at a faster rate than previously anticipated, raising concerns among investors regarding the sustainability of its spending strategy.
Microsoft is the largest external investor in OpenAI, and its latest earnings report indicated a net loss of $3.1 billion due to its share of OpenAI’s losses. As OpenAI’s valuation soars, these losses have begun to weigh on Microsoft’s financial performance. Despite these challenges, Microsoft’s diverse revenue streams, which encompass core products like Windows and Office, as well as its advertising, cloud, gaming, and LinkedIn sectors, remain robust.
Looking ahead, analysts maintain an optimistic outlook for Microsoft, citing strong demand for AI-related products boosting its Windows and Office businesses. The company is also gaining ground in the cloud market, narrowing the gap with market leader Amazon (AMZN). While there are concerns about the impact of increased AI-related capital expenditures on profitability—especially regarding depreciation—Microsoft’s current valuation appears attractive.
The forward price-earnings (P/E) ratio has fallen to just under 30x, which many analysts deem reasonable given the broader market’s valuation landscape. As tech companies brace for lower valuation multiples in the coming quarters, driven by aggressive spending in AI, Microsoft’s stock may present a buying opportunity amidst the recent market selloff.
Investors looking to capitalize on this situation may find Microsoft a particularly appealing choice as it continues to innovate and expand its market presence. The combination of a healthy dividend yield relative to its peers and the potential for future growth makes Microsoft stock a strong candidate for those seeking stability and growth in a fluctuating market.
