Dividend-Paying Stocks: Are They Too “Slow-Growth?”

Dividend-Paying StocksCountless earnings reports are still hitting the Street—and a lot of them are from dividend-paying stocks.

It hasn’t been a bad first-quarter earnings season overall. We know that sales growth is pretty slow for brand-name businesses. And those companies generating double-digit growth on the stock market are expensively priced.

In a slow-growth world, I still feel that dividends are an important component to portfolio management and that investing in dividend-paying stocks can be done alongside higher risk, perhaps faster-growing companies.

Are Dividend-Paying Stocks Worth It?

A well-established business that’s growing incrementally, say only at the rate that the economy can produce, is not necessarily a bad investment.

What matters is whether or not the company’s dividends are going up. Institutional investors pay up for growing earnings and dividends…and they’re the participants that move big-cap stocks.

One particularly good investment strategy to consider is dividend reinvestment. This can be done automatically, typically at no cost to the shareholder.

You take the dividends that a company pays and your broker reinvests them automatically in new shares. This is a great way to build a position in a long-term investment over time. Instead of using a company’s dividends as income (which a lot of retired persons do), you’re buying more shares in the company that you already own. And over time, the returns can add up nicely. More shares equal more dividends, and so on.

This Company’s Dividends Just Keep Going Up

Among the market’s well-known dividend payers is Automatic Data Processing, Inc. (NASDAQ/ADP). The payroll and benefits outsourcing company has been a solid wealth creator over time, and management has a good track record of increasing its quarterly dividends to stockholders.

ADP just beat the Street with its latest earnings report. According to the company, total sales for its most recent quarter improved seven percent comparatively to $3.0 billion.

The company’s pretax quarterly earnings improved 12% to $743 million and diluted earnings per share grew 16% over the same quarter last year to $1.04.

ADP has been buying back a lot of its own shares and management just confirmed this fiscal year’s earnings per share should come in at the high end of its previous forecast.

ADP is a good benchmark stock. It’s worth following even if you aren’t particularly interested in this solid dividend payer, because its business is a barometer.

Dividends for a Slow-Growth World

Is it wise to consider dividends for a slow-growth world? As a part of any equity market portfolio—absolutely. These positions can help build the foundation of a portfolio, with room left over for faster-growing businesses.

With the stock market having gone up tremendously on the back of the Fed-induced monetary supercycle, I think it’s very reasonable to expect nothing from the main market averages this year.

So, dividends matter. Whether it’s for income or reinvestment, they might not get the headlines, but they still provide returns in a slow- or no-growth world.