The best dividend stock?

"Who cares?" you may be thinking

Well, you better care. Because if you don't pay close attention to what I'm about to say, the chances of your perfect retirement are about slim to none.

Why so dramatic?
One of the biggest threats to a comfortable future is not being able to generate enough income to meet your expenses. There are many paths to retirement, but let's say you want to live off your interest and income without touching your principal. If you need $50,000 a year to live happily, and you've socked away $1 million, you'll need to earn 5%.

When interest rates on CDs and savings accounts were actually above 5%, this wasn't an unfathomable task. However, the financial collapse of 2008 has pushed rates so low that most investors are earning just about nothing in their primary money market funds. Even if you invest in a five-year CD, the national average APR is 2.88%, according to

The best solution out there
If you're worried about volatility in the market, you certainly can't be blamed. Don't think you need to invest in popular growth stocks just to make money; that type of investing definitely isn't for everyone. But don't forget the bottom line: You need to be in the market in order to beat inflation and survive.

The best move you can make is to invest part of your portfolio in dividend-paying stocks. Not only do they provide you with a recurring stream of income, but they also offer room for growth. This is critically important as your portfolio needs to keep pace with inflation in order for you to maintain the style of living to which you're accustomed.

Worried that dividend stocks can't grow at a significant pace?

Here's some food for thought: Microsoft (Nasdaq: MSFT), although commonly thought of as a tech giant and not a dividend payer, has increased its dividend payout over the past five years by 8%. And the kicker is that on an annualized basis, its dividend-adjusted share price has grown by 21% over the past 20 years, far superior to the adjusted returns of the S&P 500. Yielding nearly 2%, Microsoft remains an interesting, albeit unconventional, dividend play.

Think Microsoft is a fluke?

That couldn't be further from the truth. In fact, professor Jeremy Siegel has illustrated that, from 1957 to 2003, when reinvesting dividends, the S&P's 100 highest-yielding stocks outperformed the market by an average of three percentage points. Revisiting the previous example of a $1 million portfolio, that's an extra $30,000 a year on average -- just by investing in dividend payers. This just shows that dividend stocks don't just offer payouts; they can certainly grow as well.

The royal family of dividends
Fortunately, every year the S&P comes out with what it calls the "S&P 500 Dividend Aristocrats" -- essentially the best of the best from the dividend world. Only the cream of the crop make the team, so there's some pretty stringent requirements:

  • Minimum market cap of $3 billion.
  • Minimum average trading volume of $5 million to ensure liquidity.
  • Company must have increased dividends every year for at least 25 years.

Finding companies that have increased their dividends for a quarter-century is no easy task. These companies have had to prove they can sustain cash flow and withstand downturns in order to consistently return money to shareholders.

Let's take a look at six companies that made the squad, and see how they've performed over the past five years (adjusted for dividends, naturally).


Paying Dividends Since

5-Year Dividend Growth Rate

5-Year Annualized Stock Growth Rate

CenturyTel (NYSE: CTL)




McDonald's (NYSE: MCD)




Emerson Electric (NYSE: EMR)




Coca-Cola (NYSE: KO)




Walgreen (NYSE: WAG)




Eli Lilly (NYSE: LLY)




Data from and Yahoo! Finance.

Not only do these companies have long track records of returning cash to shareholders, they've also demonstrated the ability to grow those dividends well above inflation (typically 3%-4%). In addition, most of these stocks have handily beaten the S&P over the five-year time period when the broad index returned about 1% annually.

So not only do the aristocrats offer tremendous income, which you'll obviously need as a retiree, but they increase the value of your portfolio as well.

Now, time to deliver what has been promised. The best dividend stock. Period.

And the winner is ... Automatic Data Processing!

Check out some quick stats on my favorite dividend superstar:


Paying Dividends Since

5-Year Dividend
Growth Rate

20-Year Annualized Stock
Growth Rate

Automatic Data Processing




One reason I think ADP is a great business is because it's so easy to understand. The company writes checks for other companies. Plain and simple. It has more than 500,000 customers, and in 2008 it processed about $1 trillion in funds -- that's more than the GDP of Australia, the world's 13th-largest economy! Every time it distributes a check, ADP takes a cut. And in the interim between receiving funds and writing a check, it generates a pile of interest. That interest is a great kicker for an already great business model (especially if you think interest is going up – then ADP's revenues from float are sure to go up too). All this and more is why ADP has totally dominated the market over the past five, 10, and 20 years, and it's also why our Motley Fool Income Investor team recommended the company in June 2009.

Income Investor looks for companies just like the aristocrats: stocks that pay hefty dividends, can increase them over time, and have substantial room for growth. It's the best way to ensure that your portfolio will survive the roughest of times, and that you'll always have enough income to retire the way you imagined.

If you're serious about setting yourself up for financial success, then Income Investor may be the right place for you. Just by being a guest of our service, free for 30 days, you can see all of our past and present recommendations in addition to the six stocks you should "buy first." Click here for more information.

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Fool contributor Jordan DiPietro owns no shares of companies mentioned above. Coca-Cola and Microsoft are Motley Fool Inside Value picks. Automatic Data Processing, Emerson Electric, and Coca-Cola are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool's disclosure policy is glad that tax season is finally over.