In this low interest rate environment, investors have turned to high-yielding blue-chips as a source of retirement income. This five-part series will outline what I believe to be the top five dividend aristocrat stocks, most suitable for a retiree’s portfolio.

In my previous articles on dividend aristocrats, I told you about paper-products manufacturer Kimberly-Clark (NYSE: KMB) and Emerson Electric (NYSE: EMR), which focuses on electrical-power solutions for consumers and industry.

#-ad_banner-#Today, I want to draw your attention to a company that serves as an essential “behind-the-scenes administrator” — cutting checks, managing accounting services and overseeing direct deposit transfers — for employees at corporations across the United States, as well as overseas.

This New Jersey-based firm began in 1949 as a manual payroll processor. Focused on increasing efficiency for its customers, its business evolved from punch cards to automated paycheck printing. Today, this company issues paychecks to about one out of every six Americans. I’m talking about Automatic Data Processing (Nasdaq: ADP).

Dividends keep growing
This business success translates into steady and regular dividend increases. ADP currently distributes $0.395 per quarter or $1.58 annually. At the stock’s current price  — near $54  — this works out to a forward yield of almost 3%. And more important: The company has consistently increased its dividend every year since 1974. In 2009, for example, the company paid out $1.33 in dividends. In 2010, it paid 3.7% more — $1.38 per share; and in 2011, dividend payments reached $1.48 per share. By 2012, dividends should be at least $1.58, another jump of 7.1% from 2011.

Steady earnings growth backs the company’s regular dividend increases. Despite weakness in the U.S. job market — which means fewer corporations needing to issue paychecks to their employees — ADP has maintained its strong customer base. Client retention is at a historical high, according to ADP CEO Carlos Rodriguez. In addition, revenue and profits are expected to expand during the coming year.

That’s because ADP is focusing on diversifying its service offerings. Besides providing payroll administration services, the company now also helps corporations with many facets of human resources, including hiring, managing compensation and benefits packages and overseeing retirement planning. ADP also provides a multitude of business solutions for vehicle dealers.

Expanding its traditional markets is an important aspect of the company’s growth strategy. Traditionally, ADP focused on serving large corporations. It’s now taking on rival Paychex (Nasdaq: PAYX) in attempt to dominate human resources and payroll services in small- and medium-sized businesses, too. The strategy appears to be working.

From a technical perspective, ADP looks strong.

As the below chart shows, shares have been climbing for the past two years. In the process, a major uptrend line formed.


Currently, the stock is at about its so-called “support level,” trading at roughly $54 a share. As long as this support level is maintained, the stock is likely to continue moving higher over time. Also, because the shares are at a multi-month low, now may be a potentially attractive time to purchase the stock.

Resistance — the opposite of support and the price at which a stock is unlikely to exceed — which is about $56.70, the two-year high reached in early 2012. Shares could easily retest this high, marking at least a 5% gain. But if resistance were broken, then the stock should could potentially move higher.

This bullish technical outlook is backed by strong fundamentals.

No end in sight for rising revenue
ADP’s revenue has increased every year since 2003. In early May, the company reported upbeat fiscal third-quarter results. Due to new business sales across several payroll service areas, revenue for the period increased 7% year-over-year, reaching $2.9 billion.

With U.S. unemployment rates expected to decrease in the coming months, the number of employees on ADP’s payroll processing plans is also likely to grow. As such, management anticipates full-year 2012 revenue to rise 7-9% to at least $10.6 billion  — up from $9.9 billion in 2011. For full-year 2013, analysts expect revenue to increase a further 8% to $11.5 billion.

 The earnings outlook is equally strong.

In the most recently reported third-quarter, earnings rose 8% to $0.92, from $0.85 in the year-earlier period.

With an expected increase in demand for ADP’s business services, the company projects full-year 2012 earnings will rise 8-9% to the range of $2.72-$2.75 per share. (In 2011, it stood at $2.52 per share.) By full-year 2013, analysts project earnings could increase at least another 10%, to $3.01 per share. This earnings increase should translate into regular dividend increases over time.

In addition to a strong fundamental outlook, the company currently has $1.7 billion in cash. With more than $6 billion in equity and only $17.3 million in debt, it has an outstanding debt-to-market-capitalization ratio of less than 1%, making its balance sheet rock solid.

Action to Take –> Even during a soft economic environment, ADP has managed to grow its revenues and earnings — and reward shareholders through regular dividend increases. By expanding its service offerings and product portfolio, the company has maintained its stronghold in the payroll services industry. The stock is suitable for retired investors who want regular and increasing dividends for some time to come.