Investing.com — Morgan Stanley conducted a strategic refresh of its dividend stock portfolio, making key changes to reflect changing market dynamics and carefully reassessing risks and opportunities.

One of the biggest changes is the decision to phase out Microsoft Corp (NASDAQ:)., one of the biggest names in technology. The move is part of a broader strategy by Morgan Stanley to reposition its portfolio toward sectors and companies that offer solid dividend yields, defensive characteristics and promising growth prospects amid rising geopolitical tensions and changing economic conditions.

As part of a major portfolio overhaul, Morgan Stanley has introduced two modern companies: General Dynamics Corp (NYSE:) and Constellation Energy Corp.

These companies were considered a good fit for this portfolio due to their potential to capitalize on increased global defense spending and growing demand for reliable electricity, especially from data centers.

General Dynamics, a leading defense contractor, is poised to benefit from a global escalate in defense spending driven by rising geopolitical tensions.

The company’s diverse portfolio, including combat, naval and aviation systems, places it well-positioned to benefit from increased defense budgets from the U.S. and other NATO countries.

In addition, increased production of Gulfstream business jets promises to drive margin growth, contributing to General Dynamics’ diversified growth prospects.

Aerospace and defense analyst Morgan Stanley raised the stock to “Overweight” and set a price target of $345, highlighting a potential total return of 21%, including a 2% dividend yield.

Constellation Energy, the largest nuclear power company in the U.S., was added to the portfolio to escalate its exposure to the utility sector. As demand for energy increases, especially on an already constrained grid, Constellation Energy’s nuclear capabilities are expected to play a key role.

The company’s sturdy core business, supported by manufacturing-related tax breaks, and potential growth in electricity demand, particularly in data centers, make it an attractive acquisition.

Morgan Stanley’s Power & Utilities analyst sees Constellation Energy as a potential beneficiary of growing demand for low-carbon, reliable energy, driven by data center expansion and the broader energy market. With a $233 price target, the stock offers a promising combination of defensive stability and growth potential.

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

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

This escalate in capital intensity could impact Microsoft’s margins due to an escalate in depreciation and amortization expenses, which could potentially impact the company’s ability to maintain dividend growth – a key factor in its inclusion in the Dividend Stock Portfolio.

By removing Microsoft, Morgan Stanley not only retains its earnings but also allocates those funds to stocks with higher dividend yields and more defensive characteristics, which is closer to the portfolio’s objectives.

In addition to these headline changes, Morgan Stanley has also made several changes 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 the portfolio remains in line with its benchmark.

The brokerage firm boosted its holdings in Merck & Co. Inc, M&T Bank Corp (NYSE:) and Johnson & Johnson (NYSE:) – all of which are seen as high-dividend paying stocks with solid growth prospects.

On the other hand, the portfolio’s exposure to T-Mobile US (NASDAQ:) Inc. stocks and Starbucks Corp (NASDAQ:) fell, reflecting concerns about competitive pressures and potential challenges in maintaining growth.