Morgan Stanley has updated its dividend portfolio and dropped this big tech name from Investing.com

Investing.com — Morgan Stanley has undertaken a strategic refresh of its dividend portfolio, making key adjustments that reflect changing market dynamics and a careful reassessment of risks and opportunities.

One of the biggest changes is the decision to quit Microsoft Corp (NASDAQ:)., one of the biggest names in technology. The move is part of Morgan Stanley’s broader strategy to refocus the portfolio towards sectors and companies that offer robust dividend yields, defensive characteristics and promising growth prospects amid rising geopolitical tensions and evolving economic conditions.

In this portfolio review, Morgan Stanley introduced two additions: General Dynamics Corp (NYSE: ) and Constellation Energy Corp.

These companies were identified as suitable for the portfolio due to their potential to capitalize on increased global defense spending and the growing demand for reliable electricity, particularly from data centers.

General Dynamics, a major defense contractor, is poised to benefit from a global increase in defense spending driven by heightened geopolitical tensions.

The company’s diverse portfolio of combat, marine and aerospace systems positions it well to capitalize on expanding defense budgets in the US and other NATO countries.

In addition, increased Gulfstream business jet production promises margin expansion, adding to General Dynamics’ diversified growth prospects.

The Aerospace and Defense analyst at Morgan Stanley upgraded the stock to Overweight with a $345 price target, highlighting its potential for a 21% total return, including a 2% dividend yield.

Constellation Energy, the largest US nuclear utility, was added to the portfolio to increase exposure to the Utilities sector. As energy demand increases, especially in an already constrained grid, Constellation Energy’s nuclear power capabilities are expected to play a crucial role.

The company’s strong core business, supported by manufacturing tax credits, and potential upside from rising electricity demand, particularly from data centers, make it an attractive addition.

Morgan Stanley’s Power & Utilities analyst sees Constellation Energy as a potential beneficiary of the growing need for low-emission, high-reliability power driven by the expansion of data centers and the broader energy market. With a price target of $233, the stock offers a promising combination of defensive stability and upside potential.

The decision to remove Microsoft from the portfolio, however, is perhaps the most surprising aspect of this strategic update. Despite the tech giant’s impressive 69% gain since its listing in October 2022, Morgan Stanley has raised concerns about the company’s rising capital spending, particularly related to its investments in generative AI (Gen AI) and infrastructure cloud.

While Microsoft remains a leader in enterprise software, cloud services and AI applications, the market is starting to look more closely at the company’s capital growth.

This increase in capital intensity could hurt Microsoft’s margins as depreciation expense increases, potentially impacting its ability to sustain its dividend growth — a key driver for its dividend portfolio inclusion.

By shedding Microsoft, Morgan Stanley is not only locking in gains, but reallocating those funds to stocks with higher dividend yields and more defensive characteristics, aligning more closely with portfolio objectives.

Beyond these headline changes, Morgan Stanley has also made some adjustments to the weightings of other stocks in the portfolio as part of its ongoing risk management process. This rebalancing is designed to maintain an attractive risk profile while ensuring that the portfolio remains aligned with its benchmark.

The brokerage grew its positions in Merck & Co. Inc, M&T Bank Corp (NYSE: ) and Johnson & Johnson (NYSE: ), all seen as strong dividend-paying stocks with solid growth prospects.

Conversely, portfolio exposure to T-Mobile US (NASDAQ:) Inc and Starbucks Corp (NASDAQ: ) was reduced, reflecting concerns about competitive pressures and potential challenges in maintaining growth.