Dividend Increase | Automatic Data Processing (ADP)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks ADP for the dividend increase!

There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On November 11th the Board of Directors at Automatic Data Processing (ADP) approved an increase in the quarterly dividend from $0.91 up to $0.93.  All things considered that's a decent 2.2% increase.  ADP is a Dividend Champion with 44 consecutive years of dividend growth.  Shares currently yield 2.17% based on the new annualized payout.

The new dividend will be payable January 1st to shareholders of record as of December 11th.  

Since I own 17.094 shares of ADP in my FI Portfolio, this raise increased my forward 12-month dividends by $1.37.  This is the 2nd dividend increase I've received from ADP since initiating a position in October 2019.  Total organic dividend growth over that time is an excellent 18%.  

A full screen version of this chart can be found here.

Automatic Data Processing is a business that I had wanted to own for a while but it was perpetually expensive.  In October 2019 I felt it was at a reasonable, but still expensive, valuation and decided to dip my toes in the water.  While ADP typically doesn't carry a high dividend yield, usually it's in the area of the S&P 500 yield, the dividend growth has historically been superb and I expect that will continue after the economy normalizes after the COVID black swan.  

Dating back to 1991 there's been 29 rolling 1-year periods and ADP has given year over year dividend growth ranging from 3.6% to 33.0% with an average of 14.3% and a median of 14.8%.

Over that same time there's been 25 rolling 5-year periods and ADP has given annualized dividend growth ranging from 7.6% to 21.0% with an average of 13.4% and a median of 13.4%.

There's also been 20 rolling 10-year periods and annualized dividend growth has ranged from 8.8% to 18.1% with an average of 13.3% and a median of 13.8%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1991 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

ADP's 5-year average forward dividend yield is 2.24% which corresponds to a share price of $166 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 5-year moving average yield +/- 10%.  That gives a fair value range of $151 - $184 and suggests that Automatic Data Processing is trading on the higher end of fair value.

Wrap Up

This raise increased my forward dividends by $1.37 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my FI Portfolio's current yield of 2.60% this raise is like I invested an extra $52 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way. 

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

I've now received 37 raises from the companies in my FI Portfolio increasing my forward-12 month dividends by $259.19.

My FI Portfolio's forward-12 month dividends are $7,553.66  Including my FolioFirst portfolio's forward dividends of $104.59 brings my total taxable accounts dividends to $7,658.25.  My Roth IRA's forward 12-month dividends are $671.66.  My Rollover IRA's forward dividends are $3,108.51.  Across all accounts I can expect to receive $11,438.42 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Automatic Data Processing's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Automatic Data Processing?  How concerned are you about the small dividend increase?  Prudent move by management or something to be concerned about?

Please share your thoughts below.