Truly reliable dividend stocks can be hard to find, but there are some companies on the market that are good candidates for income investors. If you are looking for long-term passive income from a stock, the company should have sustainable competitive advantages, strong efficiency metrics, adequate financial health and a history of cash flow generation.
One of the leaders in the human resources software industry actually fits that description—it’s a passive income powerhouse thanks to decades of reliable cash flow and a stable outlook.
Sustainable competitive advantage
Stability is a prerequisite for unstoppable dividend stocks, and Automatic data processing (NASDAQ:ADP) is a stability model with plenty of data to support this fact. The company is one of the market leaders in the payroll and human resources management software industry. The company has customers in 140 countries with more than 1 million customers. This diverse presence means ADP is not tied to the well-being of any one customer, industry or nation.
Its financial success is determined by strategic execution, operational efficiency and global employment trends. ADP creates a major economic advantage due to the switching costs and its enormous scale. The company is consistently ranked among the best providers of its core product offerings by industry analysts, indicating a breadth and quality of its portfolio that competitors find difficult to replicate. The company’s sheer size also results in efficiencies that allow it to charge competitive prices that smaller providers cannot match.
ADP serves several functions that are essential to every business, and customers know it is one of the best, most cost-effective options available. This makes it easier to acquire new customers and deters existing customers from switching to a competitor. The sustainable competitive advantage created by this economic moat is one of the keys to ADP’s impressive stability and increases the likelihood that the company will have no problems paying dividends to shareholders in the future.
The data supports the story
ADP has a number of excellent key statistics that support its impressive stability narrative. The company has delivered remarkably stable long-term growth across a variety of key metrics. Sales, net profit and free cash flow have increased steadily. The company’s compound annual revenue growth rate (CAGR) of 7.6% over the past decade has been outpaced by profits as the company achieves efficiencies on a larger scale.
ADP’s constant expansion is perfect for passive income. The company generates reliable cash flow growth, which it returns to shareholders. The company has had 49 consecutive years of dividend growth and is expected to become the dividend king this year. Companies with unpredictable cash flow cannot become dividend kings.
The company’s efficiency metrics are also impressive. The return on invested capital (ROIC) is over 40%, which is exceptionally high and continues to grow. A high ROIC indicates a company that uses its capital efficiently to generate profits. This metric is confirmed by an impressive net profit margin of 20%, meaning that a large portion of sales are converted into profits. There are no major corporate expenses that impact profitability. ADP’s leadership team runs tight management and demonstrates impressive leadership skills.
Efficient operations tend to promote strong cash flow generation, and strong cash flow generation is key to a healthy dividend. This is exactly why income investors love ADP. The stock’s expected dividend yield of 2.3% isn’t the highest you’ll see in the market, but it’s still a decent income yield for passive income. Given the company’s potential to increase shareholder distributions in the future, investors today are clearly willing to accept a lower yield.
Because ADP can deliver reliable, modest growth for the foreseeable future, shareholders can reinvest this return to grow profits and boost future earnings. Retirees can confidently integrate ADP into an income portfolio with other top dividend stocks and bonds to meet their current cash flow needs.
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Ryan Downie holds positions in the field of automated data processing. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Secret to Passive Income Is Hidden in This Unstoppable Dividend Stock was originally published by The Motley Fool