We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold Now. In this article, we are going to take a look at where Automatic Data Processing, Inc. (NASDAQ:ADP) stands against the other dividend growth stocks.

The AI sector maintained its momentum unabated in the second quarter of 2024, with tech stocks continuing to lead the charge. Despite the Fed scaling back rate cut expectations from three to one at the quarter’s outset, stocks surged to end in positive territory by quarter-end. This was buoyed by better-than-expected inflation numbers and strong first-quarter earnings. The broader market gained 3.48% in Q2 2024 and its 12-month returns came in at over 23.4%. Dividend stocks underperformed the broader market recently, but with tech giants now beginning to issue dividends, analysts are optimistic about dividend prospects this year. The recent addition of Alphabet to the dividend-paying group suggests that these mega-cap tech companies could increase their dividends gradually over time. However, analysts caution that current dividend yields from these stocks remain relatively modest.

In the current market environment, investors are keenly exploring opportunities to boost their income. Despite their low performance so far this year, dividends gain importance in this regard as they have historically been crucial in generating returns for investors over many decades. Since 1960, approximately 85% of the total cumulative return of the S&P 500 Index can be traced back to reinvested dividends and the compounding effect they offer.

When we talk about the compounding effects of dividends, we refer to the advantages they provide, particularly when they grow consistently over time. This growth allows for larger dividend payouts which, when reinvested, can further accelerate the overall investment return through compounding. In addition to providing compounding effects, companies that raise their dividends have also historically outperformed the market and those companies that cut or don’t pay dividends at all. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 9.62% return to shareholders from 1972 to 2018, compared with an 8.78% return of dividend payers. Dividend growers also outperformed dividend non-payers, who returned only 2.40% during this period. Read more about dividend growers in our article, Best Dividend Kings to Buy for Safe Dividend Growth.

A company’s past track record of growing dividends is often the best crystal ball for predicting future growth. A low payout ratio, which measures dividends against earnings, also signals potential for future dividend growth. High dividend yields can falter in tough times, precisely when investors rely on them most. Companies with a history of dividend growth demonstrate their resilience, continuing to increase dividends even in downturns. Currently, there is rising demand for companies that distribute dividends, driven by an aging US population, seeking additional sources of immediate income. According to a report by Janus Henderson, global dividends reached $1.66 trillion in 2023, growing from $1.23 trillion in 2020. The banking sector achieved record-high dividends last year, accounting for half of the global dividend growth. This increase was largely facilitated by a higher interest rate environment, which allowed many banks to expand their profit margins. The firm expects global dividends to reach their all-time high of $1.72 trillion in 2024, which would show a 3.9% growth from 2023 on a headline basis.

Companies that consistently raise their dividends have strong business models and solid balance sheets. In this article, we will take a look at some of the best dividend aristocrat stocks for dividend growth.

Our Methodology:

For this article, we scanned the list of Dividend Aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Automatic Data Processing, Inc. (NASDAQ:ADP)

5-Year Annual Dividend Growth Rate: 12.2%

Automatic Data Processing, Inc. (NASDAQ:ADP) is a New Jersey-based management services company that offers a wide range of services, including payroll processing, tax administration, and human capital management. The company is a leading player in the payroll and human capital management software industries. This diverse presence ensures that the company is not dependent on the success of any single customer, industry, or company.

Automatic Data Processing, Inc. (NASDAQ:ADP) reported strong fiscal Q3 2024 earnings due to healthy new business bookings and high client retention. Its commitment to delivering innovative products, differentiated services, and exceptional experiences has led to record-high client satisfaction this fiscal year. With a stable demand for human capital management (HCM), the company is focused on executing successfully in the upcoming quarters and building momentum in fiscal 2025.

Automatic Data Processing, Inc. (NASDAQ:ADP) reported revenue of nearly $5.3 billion in fiscal Q3 2024, up from $4.9 billion during the same period last year. The company’s net earnings for the quarter also jumped to $1.2 billion, from $1 billion in the prior-year period. As a dividend company, it has carefully managed its cash flow, enabling it to consistently increase its payouts year after year. In the most recent quarter, the company generated nearly $3 billion in operating cash flow.

Automatic Data Processing, Inc. (NASDAQ:ADP) currently offers a quarterly dividend of $1.40 per share and it supports a dividend yield of 2.39%, as of July 2. It is one of the best dividend aristocrat stocks on our list as the company has been raising its payouts for 49 consecutive years. Moreover, its 5-year average annual dividend growth rate is over 12%.

According to Insider Monkey’s database, 52 hedge funds in Insider Monkey’s database owned stakes in Automatic Data Processing, Inc. (NASDAQ:ADP), compared with 54 in the previous quarter. The total value of these stakes is over $3.8 billion. Citadel Investment Group remained bullish on the stock during the quarter, boosting its position in the company by 787%.

Overall ADP ranks 3rd on our list of the best dividend growth stocks to buy and hold. You can visit 10 Best Dividend Growth Stocks to Buy and Hold Now to see the other dividend growth stocks that are on hedge funds’ radar. While we acknowledge the potential of ADP as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than ADP but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.