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Why Automatic Data Processing (ADP) is a Great Dividend Stock Right Now

All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

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

Automatic Data Processing (ADP) is headquartered in Roseland, and is in the Business Services sector. The stock has seen a price change of 17.93% since the start of the year. Currently paying a dividend of $0.69 per share, the company has a dividend yield of 2.29%. In comparison, the Outsourcing industry's yield is 0.48%, while the S&P 500's yield is 2.02%.

In terms of dividend growth, the company's current annualized dividend of $3.16 is up 25.4% from last year. Automatic Data Processing has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 7.98%. 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 60%. This means it paid out 60% of its trailing 12-month EPS as dividend.

ADP is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $5.27 per share, which represents a year-over-year growth rate of 21.15%.

Bottom Line

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, ADP presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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