We recently published a list of 10 Magnificent Dividend Growth Stocks to Invest In. In this article, we are going to take a look at where Automatic Data Processing, Inc. (NASDAQ:ADP) stands against other magnificent dividend growth stocks to invest in.

Dividend stocks remain a popular choice among investors due to their ability to generate steady income. Experienced investors, including Warren Buffett, have long recognized their value, as evidenced by the significant presence of dividend-paying stocks in his portfolio. While often underestimated, dividends have played a crucial role in overall investment returns. Between 1960 and the end of last year, approximately 85% of the broader market’s total cumulative return stemmed from reinvested dividends and the benefits of compounding. Strategies centered around dividend-paying stocks offer the potential for greater stability, consistent income, and a safeguard against economic uncertainty, making them a strong choice for resilient portfolios.

With ongoing tariff uncertainty in the U.S. contributing to market volatility, investors are increasingly turning to dividend-focused strategies to strengthen portfolio stability. After a period dominated by growth stocks, interest in dividend investing has gained momentum. Over the six months leading up to January 31, 2025, US-listed dividend-focused exchange-traded funds (ETFs) recorded average monthly net inflows of nearly $3.3 billion, a sharp rise from the $107 million seen during the same period the previous year, according to a report by Franklin Templeton. Amid an uncertain global economic outlook, investors are seeking more stable assets to create balanced portfolios. Dividend stocks, particularly those with strong fundamentals, tend to provide steady and predictable cash flows. Since these cash flows play a key role in equity valuation models, determining the intrinsic or fair value of dividend-paying stocks is generally more straightforward compared to assessing the value of growth stocks.

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Dividend stocks are attractive due to their ability to reduce volatility during market downturns while still providing meaningful growth potential. Historically, dividend-focused strategies have shown resilience across different regions and time periods. The Franklin Templeton report further highlighted that over the three years ending December 31, 2024, dividend-paying stocks experienced lower volatility and smaller maximum drawdowns compared to the broader market across global, US, and European segments. When inflation and interest rate concerns resurfaced last August, dividend stocks proved to be relatively stable in comparison.

Among dividend stocks, investors are more inclined to companies that have raised their payouts consistently. A report by Nuveen indicated that companies initiating or increasing dividends have historically performed well in the three years following an initial Federal Reserve interest rate hike. While the Fed began lowering rates in 2024, the report suggested that rate cuts would proceed at a slower pace in 2025 due to persistent inflationary pressures.

Given the higher interest rate environment, the report emphasized the importance of focusing on dividend-paying companies with strong fundamentals, solid balance sheets, healthy free cash flow, and management teams committed to sustainable dividend growth. In contrast, sectors with high yields but elevated debt levels could face challenges due to their sensitivity to interest rate changes.

Sam Stovall, chief investment strategist at CFRA, also noted that companies with a strong history of increasing dividend payments are typically well-capitalized and financially stable, making them less volatile than the broader market. He suggested that including such companies in an investment portfolio could help reduce fluctuations. Stovall also pointed out that dividend-paying firms generally experience lower volatility compared to those that do not offer dividends.

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.

At Insider Monkey, we are obsessed with hedge funds. 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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Automatic Data Processing, Inc. (NASDAQ:ADP)

5-Year Average Dividend Growth Rate: 11.84%

Automatic Data Processing, Inc. (NASDAQ:ADP) is an American management services company that offers payroll processing, tax administration, and human capital management services to its consumers. The company provides these services by utilizing cloud-based software to streamline workforce operations and allow businesses to focus on growth. In the second quarter of fiscal 2025, revenue increased by 8% year-over-year, reaching $5.05 billion. Looking ahead, the company expects full-year revenue growth of 6% to 7% and anticipates expanding its adjusted EBIT margin by 30 to 50 basis points.

With operations in 140 countries, Automatic Data Processing, Inc. (NASDAQ:ADP) manages payroll for approximately one in six U.S. workers, supporting a global workforce of 16 million employees. Its extensive client base has solidified ADP’s position as an industry leader, providing not only efficient payroll solutions but also valuable economic insights derived from workforce data. These insights, including wage benchmarks, help businesses stay competitive, adding further value to the company’s services. In the past 12 months, the stock has surged by nearly 26%.

Automatic Data Processing, Inc. (NASDAQ:ADP) maintains a strong financial position with substantial cash reserves, closing the quarter with over $2.2 billion in cash and cash equivalents. During the first half of the fiscal year, operating cash flow reached nearly $2 billion, an increase from $1.35 billion in the same period the previous year. With a track record of 50 consecutive years of dividend growth, ADP is one of the best dividend aristocrat stocks on our list. The company pays a quarterly dividend of $1.54 per share and has a dividend yield of 2.01%, as of March 9.

Overall, ADP ranks 3rd on our list of magnificent dividend growth stocks to invest in. While we acknowledge the potential for 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 time frame. 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.