2 Stocks I'll Be Adding to My Retirement Account in January

I add money to my retirement account each month. That gives me the cash to increase my existing positions and add new ones to my portfolio. However, since I already own more than 100 stocks, I must have a very high conviction about a new company to bring it into the fold.

ADP (ADP -0.35%) and EQT (EQT 0.32%) have become two high-conviction stocks for me. That's why I plan to add them to my retirement portfolio this January. A big factor driving my confidence in their future performance is their ability to pay a growing dividend.

The power of dividends

I've refocused the investment strategy of my retirement portfolio over the past few years. I'm concentrating it on stocks that pay a growing dividend. That's because dividend growers have historically delivered the highest average annual total returns:

Data sources: Ned Davis Research and Hartford Funds.

As that table shows, dividend growers and initiators have delivered superior performance compared to other dividend stocks and nonpayers.

ADP and EQT are anything but average when it comes to paying dividends. They should have the ability to grow their dividends at above-average rates in the future. That's a big driver of my conviction that they can produce above-average total returns, which could enable me to retire sooner.

Dividend royalty

ADP has an incredible track record of growing its dividend. The payroll and human capital management solutions provider delivered its 49th straight year of dividend increases in 2023. That puts it one year shy of joining the elite group of Dividend Kings.

ADP stands out among other dividend stocks because of its above-average yield and growth profile. The company currently offers a 2.4% dividend yield, well above the S&P 500's 1.5% yield. Meanwhile, it has been growing its payout at an above-average rate. It has delivered 8.3% compound annual dividend growth over the last five years, including giving investors a 12% raise in 2023. That's higher than the S&P 500's 6% compound annual dividend growth rate during that period.

ADP is in an excellent position to expand its higher-yielding payout at an above-average rate in the future. The company expects to grow its adjusted earnings per share by 11% to 13% annually in the coming years, meaning it could deliver double-digit annual dividend growth. That sets ADP up to produce a 13% to 15% average annual total return when adding its earnings growth rate to its dividend income. That should beat the market over the long term.

The fuel to become a cash flow and dividend growth machine

EQT has a spotty record when it comes to paying dividends. The natural gas giant suspended its payout in 2020 to retain additional cash to repay debt. It resumed paying dividends in 2021, setting the new quarterly payment at less than half its pre-pandemic level. EQT has since increased its payment twice (boosting it by 25% in 2022 and 5% last year).

The company could have the fuel to grow its slightly above-average dividend (currently yielding 1.7%) at a high-octane rate in the coming years. Fueling that view is EQT's robust free cash flow growth prospects:

Image source: EQT.

As that slide shows, EQT could produce a cumulative $14 billion in free cash flow over the next several years if natural gas prices stay on their current projected path. The company's growing scale and increased access to premium-priced markets drive that view. It recently signed two of the largest-ever pipeline deals and secured capacity in an LNG export facility, which should significantly increase its free cash flow in the coming years.

That would give EQT a mountain of excess cash to repay debt, repurchase shares, and pay dividends. As debt comes down to its target of $3.5 billion (from nearly $5.9 billion at the end of the third quarter following its acquisitions of Tug Hill and XcL Midstream), EQT will have more excess free cash to return to shareholders. EQT's growing free cash flow and cash returns could give it the fuel to continue producing high-octane total returns.

Robust total return potential

Companies that grow their dividend have historically outperformed the S&P 500. That data is driving me to load my portfolio with companies I believe can deliver above-average total returns in the future as they increase their dividends. ADP and EQT fit that criteria. That's why I plan to add them to my retirement account this January.