We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold in 2025. 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.
Dividend stocks had a challenging year in 2024 as investor interest largely shifted toward technology stocks. The Dividend Aristocrat Index, which monitors companies with at least 25 years of consecutive dividend growth, rose by just over 5% year-to-date, significantly trailing the nearly 26% return of the broader market. This underperformance isn’t unusual for dividend stocks, which often struggle to compete for attention against more dynamic market options. However, seasoned investors may recognize the enduring value and potential of dividend stocks over the long term.
Also read: 8 Best German Dividend Stocks To Invest In
Historically, dividends have played a significant role in the total returns of US stocks, accounting for nearly one-third of overall equity returns since 1926. Between 1980 and 2019, a period marked by declining interest rates, dividends contributed 75% to the broader market’s return. In an environment of falling interest rates, dividends become even more valuable by providing a steady cash flow when fixed-income investments may offer lower yields. Companies that initiate dividends rarely stop paying them and often increase payouts over time. In addition, offering a dividend can enhance a stock’s appeal to investors, potentially boosting its market value.
According to a report by Franklin Templeton, over the last decade, dividends for the broader market index have consistently increased, with an average annual growth rate of just over 7%. In favorable market conditions, dividends have boosted total returns. During challenging years, such as 2020 and 2022, when returns were low or negative, dividends played a more significant role in total returns, offering stability and strengthening portfolio resilience.
This resilience of dividend stocks is rooted in the robust financial health and strong balance sheets of the companies behind them. Analysts emphasize the importance of targeting high-quality dividend-paying firms when investing in this category. Ramona Persaud, who manages the Fidelity Equity-Income Fund and Fidelity Global Equity Income Fund, shares this perspective. She prioritizes investments in well-established companies with solid dividends and attractive valuations. Persaud noted that falling interest rates often create favorable conditions for dividend stocks, as their yields become more appealing compared to declining bond yields. She also highlighted that lower rates could broaden market gains, unlike the past two years, where growth was dominated by a small number of large-cap stocks. Here are some other comments from the analyst:
“Ideally, I look for a stock that has a combination of these factors. I can’t always get all 3, so I look for a good balance of them. If I can get higher quality at a cheaper price, and the company pays a compelling dividend, that’s when a stock is really interesting to me.”
High-quality companies also provide the benefit of consistent dividend growth. Investors view dividends as a long-term commitment, so companies that pay them must maintain profitability, generate returns, and ensure steady cash flow. This makes dividends an important measure of a company’s overall quality. Firms that regularly raise their dividend payments show that they are consistently generating profits, which may indicate greater resilience during economic or market downturns.
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 third 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).
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Automatic Data Processing, Inc. (NASDAQ:ADP)
5-Year Annual 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 leverages its cloud-based software and solutions to help businesses concentrate on growth while managing the complexities of workforce logistics. Operating in 140 countries, ADP processes payroll for one in every six U.S. workers and 16 million workers globally. This broad client base has established the company as a leader in its field, offering operational efficiency and valuable economic insights derived from its aggregated workforce data. These insights, such as wage benchmarks, provide businesses with competitive intelligence, enhancing the overall value of ADP’s services. In the past year, the stock has surged by over 27%.
In fiscal Q1 2025, Automatic Data Processing, Inc. (NASDAQ:ADP) posted solid earnings, with revenue reaching $4.8 billion, a 7% increase from the previous year. The company’s revenue and margin performance exceeded expectations, fueled by strong growth in new business bookings, high client revenue retention, and a rise in interest revenue from client funds.
In addition to its strong earnings, Automatic Data Processing, Inc. (NASDAQ:ADP)’s cash position has also grabbed investors’ attention. The company ended the quarter with over $2.1 billion available in cash and cash equivalents. Its total assets exceeded $49.5 billion. Its operating cash flow surged to $824.4 million in Q1, up from $326.5 million in the same period last year. In addition, its trailing twelve-month levered free cash flow reached $2.6 billion.
In November this year, Automatic Data Processing, Inc. (NASDAQ:ADP) achieved its Dividend King status, having raised its payout for the 50th consecutive year. Moreover, its 5-year average annual dividend growth rate comes in at 11.84%. The company pays a quarterly dividend of $1.54 per share for a dividend yield of 2.08%, as of December 29.
According to Insider Monkey’s database of Q3 2024, 49 hedge funds were bullish on Automatic Data Processing, Inc. (NASDAQ:ADP), compared with 52 in the previous quarter. The stakes held by these funds are worth over $3.5 billion in total.
Overall ADP ranks 3rd on our list of the best dividend growth stocks to buy and hold in 2025. 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 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.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
