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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Automatic Data Processing in Focus
Automatic Data Processing (ADP - Free Report) is headquartered in Roseland, and is in the Business Services sector. The stock has seen a price change of 17.68% since the start of the year. The payroll and human resources company is currently shelling out a dividend of $0.69 per share, with a dividend yield of 2%. This compares to the Outsourcing industry's yield of 0.97% and the S&P 500's yield of 1.77%.
Taking a look at the company's dividend growth, its current annualized dividend of $2.76 is up 9.5% from last year. Over the last 5 years, Automatic Data Processing has increased its dividend 5 times on a year-over-year basis for an average annual increase of 7.69%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. ADP's current payout ratio is 64%. This means it paid out 64% 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 $5.18 per share, with earnings expected to increase 19.08% from the year ago period.
Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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).