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When it comes to dividend investing, boring is beautiful.
That's why buying and holding the best stocks that pay dividends can deliver market-beating returns, particularly when those dividends are reinvested. Though many of today's largest tech stocks are relatively new to paying dividends, here are the two best dividend champions in the tech sector.
Data source: Yahoo! Finance.
Crucially, this says very little about either AT&T's (NYSE: T) or Automatic Data Processing's (NASDAQ: ADP) prospects going forward, so let's delve further into the specifics on these two tech dividend champions.
Image source: AT&T.
AT&T: The high-yield tech dividend aristocrat
AT&T's current yield already more than doubles the 2% yield of the S&P 500, but its 31-year streak of consecutive annual dividend increasesmakes it one of the most compelling dividend aristocrats anywhere on the market today. Looking to the future, AT&T's ability to fund continued dividend growth seems fully intact as its strong competitive position in the U.S. telecom market provides it with powerful financial and competitive positioning heading into the latter half of the decade.
In recent years, smaller U.S. telecom players T-Mobile and Sprint vastly improved the quality of their 4G networks, roughly leveling the playing field among the four main U.S. telecom carriers across key performance metrics like download speeds, upload speeds, and reliability. However, the all-but-assured deployment of 5G networks throughout the latter half of the decade will require an estimated $104 billion in additional capital expenditures, according to one telecom industry consulting company.Thanks to its scale, AT&T's roughly 18% EBITDA margin stands head and shoulders above Sprint's and T-Mobile's EBITDA margins of 3.7% and 8.4%, respectively. This increased profitability positions AT&T to continue to deliver dividend growth while it pushes into the 5G future.
With its high yield, proven commitment to dividend growth, and strong competitive stance in the U.S. telecom market, AT&T certainly stands as one of the best dividend stocks in tech today.
Image source: Getty Images.
ADP: A lucrative business with a history of strong returns
Payment processor Automatic Data Processing, or ADP for short, is a longtime Fool favorite -- a recommendation in two of our premium services-- and for good reason. As the leader in a hugely lucrative industry, ADP simply prints profits, which it has adroitly returned to shareholders in a stream of ever-increasing dividend payments.
So, what is ADP's secret sauce? At a high level, this dividend champion takes a tedious, non-core task that all companies face and makes it as simple and painless as possible. The company generates nearly 80% of its total sales from its Employer Services segment, which essentially provides many of the core HR tasks like payroll services, benefits administration, tax and compliance services, and the like. Providing this critical backend support makes ADP's business model extremely sticky; its average customer lifespan is over a decade. However, providing outsourced business tasks remains just one aspect of ADP's business. It also collects interest on a pooled employer payroll it holds on its balance sheet before dispersing them as paychecks, an aspect of its business that rising interest rates will benefit.
Its profitable, sticky business model allows ADP to funnel ever-increasing amounts of money toward its shareholders, and it shows no signs of losing momentum any time soon. The company has increased its dividend for 41 consecutive years, and it has doubled its cash dividend payments since 2007. Looking to the future, the average estimate from the 20 sell-side analysts covering the company calls for its EPS to grow at an average annual rate of 10.5% over the next five years, which should give the company ample flexibility to easily fund continued dividend growth as well. Without question, ADP remains just as compelling of a tech sector dividend champion as AT&T.
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Andrew Tonner has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing and T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.