You’ve probably heard the expression, “You shouldn’t put all your eggs in one basket.”
This is sage advice when investing because you never know what can happen, and you wouldn’t want an unfortunate event to destroy the money you’ve worked hard for. A diverse portfolio of high-quality companies can appreciate over time but still protect you from one lousy egg spoiling the bunch.
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But what if you could only hold one stock?
Technology giant Microsoft (NASDAQ: MSFT) would be my first answer. Five reasons make a compelling argument that every long-term investor should consider buying and holding Microsoft in their portfolio.
Diversification isn’t just for your portfolio; companies that make money in many ways are more dependable, too. Microsoft is a massive technology conglomerate that sells various products and services across the tech sector. It primarily operates three business segments, including:
However, this only simplifies a sprawling business that touches many markets, including personal and enterprise software, computer operating systems, cloud computing, video gaming, artificial intelligence (AI), internet search, social media, and more. Outside of mobile phones, Microsoft is virtually everywhere technology is.
Companies evolve as the world changes around them. Microsoft has thrived for decades in the technology industry, a space where disruption from innovation is almost always a threat. How? The company has done a great job creating value with its financial resources.
A company’s return on invested capital (ROIC) shows how efficiently it uses its financial resources to generate income. A high ROIC combined with sustained revenue growth is a formula for tremendous earnings growth and investment returns. Microsoft has grown to generate over $254 billion in annual revenue while averaging a 28% ROIC since 1989. That’s why the stock has turned a mere $1,000 investment at its initial public offering (IPO) into more than $6.8 million today.
Every company eventually stumbles. A strong balance sheet can act as a safety net, helping plug the holes when revenue or profits temporarily fall off. Microsoft is one of only two public companies with a AAA credit rating, the highest on Standard & Poor’s scale. The United States government currently has an AA+ rating, which, to be fair, is only just below it.
But isn’t it remarkable that a corporation has managed a better credit rating than arguably the world’s most powerful country? It’s hard to find better financial security than that.
Microsoft stock is known for its impressive price appreciation, but don’t overlook its dividend history. The company has paid and raised its dividend for 22 consecutive years and by an annual average of 11% over the past decade. The dividend’s starting yield won’t wow you; it’s only 0.7%. However, it all adds up. Microsoft’s dividend contributes nearly 40% to the stock’s lifetime investment returns.
Plus, the dividend is only about a quarter of Microsoft’s earnings estimates, leaving plenty of room for management to continue increasing that dividend for years to come.
Microsoft generates more than $250 billion in annual revenue and has a $3 trillion market cap. The company’s ability to continue growing at this size is possibly the most impressive aspect of its business. In Q1 of its fiscal year 2025, ended Sept. 30, 2024, the company enjoyed 16% year-over-year revenue growth. Microsoft’s three business units each grew by double digits, so this is companywide momentum.
AI could drive Microsoft’s growth for the foreseeable future. Microsoft is enhancing various parts of its business with AI technology, and the company’s massive data center investments to support AI computing needs are funneling business to its cloud platform, Azure. The world is becoming increasingly technological. Given Microsoft’s large shadow in the broader technology landscape, I wouldn’t be surprised to see the company growing well into the future.
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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 4, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and S&P Global. 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.
If I Could Only Buy and Hold a Single Stock, This Would Be It was originally published by The Motley Fool
Source: finance.yahoo.com