News Analysis date published New: 
Friday, March 23, 2012 - 10:30
New Date created: 
Wednesday, March 6, 2013 - 15:02
New Date last updated: 
Friday, March 23, 2012 - 10:30

Forget 1% CDs -- This Alternative Pays Four Times More

Friday, March 23, 2012 - 10:30am

1.80%. That's the highest paying FDIC-insured bank CD I could find on BankRate.com. And that's only if keep my money tied up for five years! The average one-year CD pays just 0.72% APY.

I remember when I worked for a community bank a few years ago, just after CD interest rates plummeted from a healthy 5% to a paltry 2%.

Bank CDs, a product that customers would have lined up for in the past, became a tough sell -- especially to retirees that actually depended on the interest to live every day.

When I told one of our elderly customers he'd have to invest in a five-year CD to get a rate even remotely close to the one he got just a year earlier, he jokingly contested, "Five years? I may not even live five more years!"

I can understand that frustration.

People want a level of safety that a CD offers, with a decent amount of income that they can count on every month. But they also want the freedom to take their money elsewhere without penalty should they find an investment that pays them more.

It's that peace of mind that allows them to stay comfortably retired.

That's why it's time for a new income strategy.

A stock plan that pays up to 4X more "Interest," safely
Now before you cringe at the word "stock" and associate it with the word "risky," I have one example of a stock that could change your mind.

And it may be a great, safe alternative that pays much more than a lousy bank CD.

Automatic Data Processing (NASDAQ: ADP) isn't a household name, but it should be. If you still earn a paycheck, you're likely to spot ADP's logo on your paystub.

Founded in 1949, ADP processes payroll checks and provides benefit administration services for more than 550,000 businesses worldwide -- and it excels at serving every one of them. For every 10 clients that sign up for ADP services, only one will end up switching to a different payroll processor. No wonder the company is the leader in its industry.

ADP is also one of just four companies in the S&P 500 that have a AAA-credit rating. That status isn't easy to attain or keep. Remember, the United States -- the richest and most powerful country in the world -- was recently downgraded to AA+.

And ADP's Gibraltar-like balance sheet protects it from the worst of economic conditions -- making it less risky than other stocks. With its $1.4 billion cash hoard, ADP could pay off its tiny debt-load 42 times over.

By comparison, a huge company like General Electric (NYSE: GE) only has enough cash on hand to pay 33% of its debt obligations. Even a behemoth like Wal-Mart (NYSE: WMT) can only pay 16% of its debt with its cash.

ADP has had its finances in order for a long time and has rewarded its shareholders handsomely for decades. In fact, despite five recessions and several market crashes, ADP has had strong enough earnings and free cash flow to raise its dividend every year since 1971 without fail.

Just look at how ADP has rewarded its shareholders with a larger dividend payment every year since 1991:

A 2.87% Yield... and growing every year
Today, ADP pays a nice 2.87% dividend yield -- four times more than what the average one-year bank CD pays in interest.

But it doesn't stop there. Remember, ADP has a decades-long tradition of strong earnings growth and loves to raise its dividend every year. The company has plenty of free cash flow to continue raising its dividend well into the future.

That means the longer you hold the ADP stock, the more dividend increases you'll likely receive as a shareholder, and the larger the yield you get for each share over time (This concept is called "yield on cost").

For example, ADP currently pays a dividend every three months -- annually, its dividends total $1.58 per share.

If you buy shares of ADP at today's price of $55, and the company increases its dividend by 13% every year (as it has for the past 10 years), your yield on cost will grow significantly higher than 2.87% over time (see chart below).

Hold onto your ADP shares for five years -- the same amount of time you'd lock up your money in a 5-year CD -- and you could earn a higher and higher yield every year, with yields approaching 5% by the fifth year.

ADP vs. The Average 5-Year CD: Which Pays You More Cash Each Quarter?

So with that kind of yield growth over the next five years, how much more regular income could you receive by investing in ADP over a CD?

Let's say you invest $100,000 into a five-year CD paying the national average 1.17% APY. Then you invest a separate $100,000 into ADP at today's share price of $55. Both investments will pay you income every quarter; the CD will pay you an interest payment, ADP will pay you a dividend payment.

Look at how much more income you'd receive each year from ADP Vs. the five-year CD:

In this example, $100,000 invested today in ADP would give you a total of $12,770 more in income than a five-year CD would give you -- that's 218% more income over five years.

Action to Take --> ADP is a safe stock you could potentially buy and hold forever, but you certainly don't have to. Unlike a CD which you have to lock up your money for a fixed period of time, stocks like ADP are liquid, so you can cash in your shares at any time.

ADP is what I like to call a "forever" stock. It's a safe company you can buy and potentially hold for decades without having to worry about things like economic slowdowns, market crashes or recessions.

Christian Hudspeth does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.