Investors looking for high-quality dividend stocks should consider the list of Dividend Aristocrats, a group of 68 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. The Dividend Aristocrats possess durable competitive advantages, highly profitable business models, and long-term growth.

In addition to their dividends, the Dividend Aristocrats have generated strong risk-adjusted total returns. As a result, Dividend Aristocrats such as these 3 could offer better performance going forward, with lower risk than the S&P 500 Index. 

Automatic Data Processing (ADP)

Automatic Data Processing is one of the largest business services outsourcing companies in the world. The company provides payroll services, human resources technology, and other business operations to more than 700,000 corporate customers. Automatic Data Processing generates annual revenue of about $18 billion. 

ADP posted second quarter earnings on January 31st, 2024, and results were quite strong. Adjusted earnings-per-share came to $2.13, which was three cents ahead of estimates, and up 9% year-over-year. Net earnings were up 8% to $878 million. Revenue was up 6.4% year-over-year to $4.67 billion, and $10 million ahead of estimates. 

The company saw organic constant currency revenue rise 6%. Interest on funds held for clients rose 20% year-over-year to $225 million, as market rates remain high relative to recent history. In addition, ADP’s earnings are increasingly becoming dependent upon this interest on held funds, so it’s worth watching closely for investors. Average client funds balances actually declined 2% to $32.6 billion year-over-year, while the yield on those funds soared 50 basis points higher to 2.8%.

Importantly, this revenue growth has been accompanied by meaningful margin expansion, which means that the segment’s growth has had an outsized impact on the firm’s bottom line. In addition, the company’s buyback has been a low single-digit tailwind annually for earnings-per-share growth in the past decade, and we expect that will continue moving forward.

Recessions will undoubtedly harm earnings potential given that ADP needs people to be employed, but it held up very well during the last recession and performed better than expected during the COVID recession. The rebound out of COVID was impressive and ADP is firing on all cylinders out of what was a very short recession.

ADP has a dividend payout ratio of approximately 61% and a solid yield of 2.3%.

Sysco Corporation (SYY)

Sysco Corporation (SYY) is the largest wholesale food distributor in the United States and is expanding internationally. The company was founded in Houston, Texas, in 1969 and now serves 600,000 locations with food delivery, including restaurants, hospitals, schools, hotels, and other facilities. 

On January 30th, 2024, Sysco reported second-quarter results for Fiscal Year (FY) 2024. The company has reported robust financial results for the second fiscal quarter ending December 30, 2023. In this period of fiscal year 2024, key metrics demonstrated positive growth compared to the same quarter in the previous fiscal year. Sales increased by 3.7%, driven by a 3.4% rise in U.S. Foodservice volume and a 2.9% increase in U.S. local volumes. Gross profit saw a significant uptick of 4.9% to reach $3.5 billion, while operating income increased by 9.2% to $700.0 million. Adjusted EBITDA showed a remarkable 82.7% increase, reaching $914.3 million. 

Earnings per share (EPS) surged by 192.9% to $0.82, with adjusted EPS growing by 11.3% to $0.89. The first half of the fiscal year saw a 70.0% increase in cash flow from operations to $855.9 million, and free cash flow soared by 140.5% to $527.4 million. The company now anticipates returning approximately $2.25 billion to shareholders in fiscal year 2024, up from the initial estimate of $750 million to $1.25 billion, and has reaffirmed its fiscal year 2024 guidance for top- and bottom-line growth.

Sysco has raised its dividend every year since it went public, and we expect it to continue to grow in the years to come. As one blemish, Sysco's balance sheet is mediocre. The company has a current Debt to Equity ratio of 5.4, which is lower than last report. Sysco's stable cash flows should allow them to service the debt in most environments comfortably.

Target Corporation (TGT)

Target is a giant discount retailer with about 1,850 big box stores, which offer general merchandise and food, as well as serving as distribution points for the company’s burgeoning e-commerce business. 

Target posted fourth quarter and full-year earnings on March 5th, 2024, and results were quite strong. Adjusted earnings-per-share came to $2.98, which was a staggering 56 cents ahead of estimates. Total revenue was $31.9 billion, which was 1.7% higher year-over-year, driven mostly by an additional week in fiscal 2023 compared to 2022. 

Comparable sales were down 4.4%, which was 20 basis points better than consensus. Same-day services were more than 10% of total sales, and were up 13.6%, which was led by the company’s very popular Drive Up program. Operating margin came to 5.8% of revenue, which was up sharply from 3.7% a year ago. 

Gross margin was 25.6% of sales, also up nicely from 22.7% a year ago. The improvement in gross margin was from lower markdowns and other inventory-related costs, lower freight costs, lower supply chain and digital fulfillment costs, and favorable category mix. Shrink costs were also lower than a year ago, despite continued increases in store loss rates. 

Target has grown its earnings-per-share at an average annual rate of about 8% during the last decade. Due to fierce competition and the failed attempt to expand to Canada, Target’s earnings-per-share remained almost flat from 2012 to 2017. However, turnaround efforts have borne fruit and as a result, Target has significantly improved its performance in recent years. The company has reduced its share count over time, although the past two years have seen essentially no change. Overall, we expect 10% annualized growth from what should be a modest level for 2023 given margin issues that cropped up in recent quarters, but appear to be improving.

TGT has increased its dividend for 55 consecutive years.