We recently published a list of 15 Best Dividend Stocks To Buy and Hold. In this article, we are going to take a look at where Automatic Data Processing, Inc. (NASDAQ:ADP) stands against other best dividend stocks to buy and hold.
In recent years, many investors have shifted their focus from dividend-paying stocks to high-growth secular-themed stocks that typically don’t offer dividends. However, history shows that investors shouldn’t overlook dividends. According to estimates by AGF Investments, the long-term case for dividend-paying equities is strong: if a dollar was invested in the broader market Index in 1927 without reinvesting dividends, it would be worth $243 today. In contrast, that same dollar with dividends reinvested would be worth $3,737.
Because of this earnings and income potential, income investors often turn to dividend stocks when the market shifts. While these stocks may not be keeping pace with the broader market, analysts remain optimistic about their future prospects. A report from J.P. Morgan indicated that global equities are approaching a notable period of dividend growth, not just due to a cyclical rise in payouts but also because of a long-term increase in dividend momentum. Over the past 20 years, global dividends per share have grown at an annual rate of 5.6%, but analysts predict this growth will accelerate to 7.6%. The main factor driving this increased growth is the low starting point of payout ratios (dividends as a proportion of earnings). During the Covid pandemic in 2020, many companies cut their dividends, leading to a 12% drop in global dividends, which was a steeper decline than during the Global Financial Crisis. This was a rational response to an uncertain environment with unpredictable effects and duration.
However, equity markets rebounded strongly as global earnings soared, primarily driven by Big Tech and, more recently, AI. Since dividends are typically determined by conservative boards and management, they tend to lag behind earnings during significant earnings surges. As a result, dividend payout ratios are now near their lowest levels in 25 years, meaning companies are paying out less compared to historical averages. Simply returning to a more typical payout level could contribute an additional 2% annual growth over the next five years. This isn’t just a theoretical scenario—global dividend growth has already started to exceed earnings growth in seven of the past eight quarters, as reported by J.P. Morgan.
While recent market gains have largely been driven by a small group of non-dividend-paying companies, this is starting to shift. In 2024, many big tech companies initiated their dividend policies, highlighting the importance of returning capital to shareholders and positioning dividends as a complement to share buybacks. The report highlighted that although the dividend yields from these tech giants are initially modest, the total amount they are committing to dividends is significant—$17 billion collectively over the next year. More importantly, these actions send a strong signal to the market.
Income-focused investors have increasingly turned their attention to dividend income, making it a more prominent part of personal earnings. A report by S&P Dow Jones Indices reveals that dividend income has risen from 2.68% in Q4 1980 to 7.88% in Q2 2024, demonstrating its growing importance as an income source. The report further highlighted that since 1936, dividends have accounted for over a third of total equity returns, with the rest coming from capital gains.
Our Methodology
For this list, we scanned through various credible sources, including Business Insider, Forbes, Morningstar, and Barron’s, and identified their consensus picks from their recent articles. Next, we sorted these companies based on the number of hedge funds in Insider Monkey’s database that owned stakes in these companies, as of Q3 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).
Is Automatic Data Processing, Inc. (ADP) the Best Dividend Stock To Buy and Hold?
HR management team reviewing resumes on a computer.
Automatic Data Processing, Inc. (NASDAQ:ADP) ranks twelfth on our list of the best dividend stocks to buy and hold. The American management services company 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, Automatic Data Processing, Inc. (NASDAQ:ADP) handles payroll for one in six US workers and a total of 16 million employees worldwide. Its vast client network has established ADP as an industry leader, providing operational efficiency and valuable economic insights through its aggregated workforce data. These insights, such as wage benchmarks, offer businesses a competitive edge, further enhancing the company’s service offerings. In the past 12 months, the stock has delivered a nearly 23% return to shareholders.
In fiscal Q2 2025, Automatic Data Processing, Inc. (NASDAQ:ADP) reported revenue of $5.05 billion, up 8% from the same period last year. For fiscal year 2025, the company expects revenue growth of 6% to 7%, along with an adjusted EBIT margin improvement ranging between 30 and 50 basis points.
Automatic Data Processing, Inc. (NASDAQ:ADP)’s cash position remained stable as it ended the quarter with over $2.2 billion available in cash and cash equivalents. In the first six months of the fiscal year, the company generated nearly $2 billion in operating cash flow, showing an improvement from $1.35 billion in the prior-year period. It is one of the best dividend stocks on our list as the company has been rewarding shareholders with growing dividends for 50 consecutive years. Currently, it offers a quarterly dividend of $1.54 per share and has a dividend yield of 2.02%, as of February 4.
Automatic Data Processing, Inc. (NASDAQ:ADP) was included in 49 hedge fund portfolios at the end of Q3 2024, compared with 52 in the previous quarter, according to Insider Monkey’s database. The stakes owned by these funds are worth over $3.5 billion in total. Among these hedge funds, Fundsmith LLP was the company’s leading stakeholder in Q3.
Overall, ADP ranks 12th on our list of best dividend stocks to buy and hold. 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.
