A Stock to Build a Life On

05/04/2012 10:30 am EST

Focus: STOCKS

Howard Gold

Founder & President, GoldenEgg Investing

Buying an ultra-long-term stock requires sticking with an industry that won't disappear by the time baby goes to college...such as this payroll and tax processing company, writes MoneyShow's Howard R. Gold.

Choosing one stock for a newborn is nearly impossible. It requires foresight over 20 years, when the markets don’t look beyond 20 minutes. And the world we’ll see in 2032 will be as different from 2012 as today’s world is from 1912.

That means eliminating almost all technology and financial stocks, which may be swept away by disruptive change. I’d also avoid individual emerging-market stocks. How do you know any of them will exist in two decades, let alone be big winners?

So, I turned to Standard & Poor’s Dividend Aristocrats, S&P 1500 companies that have increased their dividends every year for the last 25 years and actually return profits to shareholders.

There are many fine choices in that group, but I picked one of only four US companies that are still rated AAA. It doesn’t make anything, and its business can’t be wrecked by floods, tsunamis, patent expirations, recessions, or policy gridlock in the US or Europe.

Automatic Data Processing (ADP) offers payroll processing, tax and benefits administration, expense management, and many other services to more than 500,000 employers in the US and around the world.

Does anyone expect these things to go away in the next 20 years? As companies grow, they outsource more of these functions. ADP gets 80% of its $10 billion in revenues from the US. Meanwhile, Asia and Latin America account for only 2% of sales, so there’s lots of upside there.

Revenues have shown single-digit percentage growth, while analysts project earnings will rise by 10% annually for the next five years. The stock sells near its 52-week high in the mid-$50s, and at 18 times June 2012 earnings and 4.4 times book value.

But the company pays out 60% of earnings in dividends (unlike some Wall Street firms, which consume half their earnings in compensation), and has increased dividends by 13% a year for the last five years. It currently yields 2.8%.

The stock is up 1,000% since 1990. We won’t see anything near that for the next two decades, but if you buy it a little cheaper—under $50—and reinvest the dividends over the next 21 years, it will be hello, profits, bye-bye college debt for your newborn-turned-graduate.

Ideally, I’d prefer to invest in one of the more diversified dividend-paying ETFs—the SPDR S&P Dividend (SDY) or Vanguard Dividend Appreciation (DIG).

But if I had to pick just one stock to buy and hold, I wouldn’t lose sleep over ADP. You can’t say that about the rest of parenting, unfortunately.

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