Lignin plays a vital role in plant adaptation to terrestrial environments. The cinnamyl alcohol dehydrogenase (CAD) catalyzes the last step in monolignol biosynthesis and might have contributed to the lignin diversity in plants. To investigate the evolutionary history and functional differentiation of the CAD gene family, we made a comprehensive evolutionary analysis of this gene family from 52 species, including bacteria, early eukaryotes and green plants. The phylogenetic analysis, together with gene structure and function, indicates that all members of land plants, except two of moss, could be divided into three classes. Members of Class I (bona fide CAD), generally accepted as the primary genes involved in the monolignol biosynthesis, are all from vascular plants, and form a robustly supported monophyletic group with the lycophyte CADs at the basal position. This class is also conserved in the predicted three-dimensional structure and the residues constituting the substrate-binding pocket of the proteins. Given that Selaginella has real lignin, the above evidence strongly suggests that the earliest occurrence of the bona fide CAD in the lycophyte could be directly correlated with the origin of lignin. Class II comprises members more similar to the aspen sinapyl alcohol dehydrogenase gene, and includes three groups corresponding to lycophyte, gymnosperm, and angiosperm. Class III is conserved in land plants. The three classes differ in patterns of evolution and expression, implying that functional divergence has occurred among them. Our study also supports the hypothesis of convergent evolution of lignin biosynthesis between red algae and vascular plants.