We recently compiled a list of the 8 Magnificent Dividend Growth Stocks to Buy Now. In this article, we are going to take a look at where Automatic Data Processing, Inc. (NASDAQ:ADP) stands against the other magnificent dividend growth stocks.

This year, dividend stocks have underperformed compared to the broader market, largely because tech stocks have captured most of the attention. The Dividend Aristocrats Index, which tracks companies with at least 25 consecutive years of dividend growth, has risen by nearly 10% year-to-date, compared to the broader market’s almost 24% gain. Despite this, dividend stocks remain a reliable choice for investors, consistently delivering returns to shareholders regardless of market conditions.

Investors tend to favor companies with strong histories of dividend growth. This preference stems from the fact that such stocks have reported solid long-term returns, often outperforming the broader market. According to a report by RMB Capital, dividend growers and initiators delivered an annual average return of 9.62% from 1972 to 2018, compared with a 2.40% return of the companies that did not pay dividends. Moreover, the broader market returned 7.30% during this period, underperforming dividend growers. The report further mentioned that companies with a track record of increasing dividends have demonstrated their ability to not only maintain but also grow payouts, even during market downturns. From a portfolio management standpoint, dividend growth portfolios offer good diversification, as companies with consistent dividend growth are typically spread across various industries. This provides an edge over portfolios that prioritize high dividend yields, which are often concentrated in mature sectors such as utilities and, before 2007, financials.

Also read: Dividend Contenders List: Top 15

Analysts suggest including dividend stocks in income portfolios. This recommendation is bolstered by the fact that several leading tech companies introduced dividend policies this year and are likely to sustain dividend growth over time, supported by their strong cash flows. David Harrell, editor of Morningstar’s DividendInvestor newsletter, shared his insights on dividend growth during a recent interview with the firm. Here are some comments from the analyst:

“You see headlines about dividend increases. That’s generally viewed as positive. There’s this whole idea of dividend growth investing by identifying companies that are growing their dividends at a regular pace. That’s indicative of companies with strong growing earnings. That’s considered positive. There’s also this idea that dividend stocks can be defensive in recessionary periods.”

While dividend stocks have shown slower performance this year, companies continue to raise their dividends steadily. A recent report from S&P Dow Jones Indices revealed that 480 dividend hikes were recorded in Q3 2024, up from 448 in Q3 2023, reflecting a 7.1% year-over-year growth. The total value of these increases for the quarter reached $14.1 billion. The report also mentioned that over the past 12 months, total dividend increases amounted to $74.7 billion, marking a rise from $63.9 billion in the previous 12-month period.

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 8 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.

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 Average Annual Dividend Growth Rate: 12.12%

Automatic Data Processing, Inc. (NASDAQ:ADP) is a New Jersey-based management services company that offers payroll processing, tax administration, and human capital management services to its consumers. The company’s dominance in HCM technology plays a crucial role in its success, highlighting its ongoing commitment to innovation and strategic acquisitions. A key move in this regard was its recent acquisition of WorkForce Software. This strategic acquisition strengthens ADP’s offerings, enabling the company to provide a broader range of large-scale workforce management solutions worldwide. The stock has surged by over 29% year-to-date.

In fiscal Q1 2025, Automatic Data Processing, Inc. (NASDAQ:ADP) reported strong earnings, with its revenue coming in at $4.8 billion, up 7% from the same period last year. The company’s revenue and margin performance in the first quarter also surpassed expectations, driven by robust growth in new business bookings, strong client revenue retention, and increased interest revenue from client funds.

Automatic Data Processing, Inc. (NASDAQ:ADP) had a strong cash position. The company ended the quarter with over $2.1 billion available in cash and cash equivalents and its total assets amounted to more than $49.5 billion. Its operating cash flow jumped to $824.4 million in Q1, from $326.5 million in the prior-year period. In addition, it trailing twelve month levered free cash flow amounted to $2.6 billion.

On November 6, Automatic Data Processing, Inc. (NASDAQ:ADP) announced a 10% hike in its quarterly dividend to $1.54 per share. Through this increase, the company achieved its Dividend King status, having raised its payouts for 50 years in a row. Moreover, in the past five years, the company has raised its payouts at an annual average rate of over 12%. The stock’s dividend yield on November 14 came in at 2.04%.

Overall ADP ranks 4th on our list of the magnificent dividend growth stocks to buy now. While we acknowledge the potential of ADP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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