Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Automatic Data Processing in Focus
Headquartered in Roseland, Automatic Data Processing (ADP) is a Business Services stock that has seen a price change of 0.96% so far this year. The payroll and human resources company is paying out a dividend of $1.4 per share at the moment, with a dividend yield of 2.38% compared to the Outsourcing industry's yield of 0.5% and the S&P 500's yield of 1.59%.
In terms of dividend growth, the company's current annualized dividend of $5.60 is up 16.9% from last year. In the past five-year period, Automatic Data Processing has increased its dividend 5 times on a year-over-year basis for an average annual increase of 10.65%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. ADP's current payout ratio is 59%, meaning it paid out 59% of its trailing 12-month EPS as dividend.
ADP is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2024 is $9.14 per share, representing a year-over-year earnings growth rate of 11.06%.
Bottom Line
Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. It's important to keep in mind that not all companies provide a quarterly payout.
For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, ADP is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).
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