Automatic Data Processing: An Awesome Dividend Stock

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Can you name an asset that’s delivered an average annual total return of 15.34% for the past decade?

One easy answer is the SPDR S&P 500 ETF Trust ($SPY).

The boring old S&P 500 ETF that’s always recommended to new investors is putting up tech stock returns. Which makes sense, because the fund’s top five holdings are all tech stocks, and these five companies compose 27.74% of the entire SPY ETF.

Now, can you name an individual company that’s been around since the 1940’s, pays a higher starting dividend yield than the S&P 500, and is beating the general market?

I can.

Automatic Data Processing, Inc. ($ADP).

This is a market-beating, inflation-beating dividend growth stock with very little debt and an extremely safe dividend payout ratio. It’s also a company Peter Lynch was recommending back in 1989 when he wrote One Up on Wall Street. And, Automatic Data Processing has continued to deliver incredible returns.

Automatic Data Processing provides payroll and HR services.

The company serves over 1.1 million small, midsized, and enterprise businesses. And, Automatic Data Processing operates in over 140 different countries. This is a well-established, internationally diversified business. But, the company is still growing and delivering impressive returns.

Automatic Data Processing has raised its dividend every year for 50 years.

And, the company still maintains an inflation-beating 5-year compound annual dividend growth rate of 11.10%. In fact, the firm’s last dividend raise, in November of 2024, was a 10% increase over the previous distribution.

And while Automatic Data Processing isn’t a high-yield stock, its 2.11% starting dividend yield is still higher than the S&P 500’s.

Additionally, Automatic Data Processing has a relatively low payout ratio of just 60.20%.

This means there’s plenty of room for future dividend growth.

On top of all this, Automatic Data Processing is a market-beater that’s delivered a 10-year average annual total return of 16.42%.

The company also has very low debt, something that’s important to watch for when examining mature businesses, and trades at a price to earnings ratio of 26.70 — slightly lower than the S&P 500’s current valuation.

I like Automatic Data Processing and think it’s a great buy-and-hold investment.

The company has solid business metrics, a low dividend payout ratio, and both inflation-beating and market-beating performance.

While this company is a little expensive and the dividend yield is only in the low 2% range, I’d still be interested in owning this stock. Automatic Data Processing has 50 years of non-stop dividend growth. And even at a long-term annual dividend growth rate of 10%, shareholders would see their yield on cost double in just over 7 years.

Automatic Data Processing is trading flat this year. And in a world where many speculative and broken businesses are going parabolic off of “potential,” this company looks like a reasonable buy-and-hold opportunity.

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Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.