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Why Paychex (PAYX) is a Top Dividend Stock for Your Portfolio

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All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Paychex in Focus

Headquartered in Rochester, Paychex (PAYX - Free Report) is a Business Services stock that has seen a price change of 6.33% so far this year. Currently paying a dividend of $0.56 per share, the company has a dividend yield of 3.09%. In comparison, the Outsourcing industry's yield is 0.98%, while the S&P 500's yield is 1.81%.

Taking a look at the company's dividend growth, its current annualized dividend of $2.24 is up 8.7% from last year. Over the last 5 years, Paychex has increased its dividend 5 times on a year-over-year basis for an average annual increase of 9.80%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Paychex's current payout ratio is 91%, meaning it paid out 91% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for PAYX for this fiscal year. The Zacks Consensus Estimate for 2018 is $2.85 per share, representing a year-over-year earnings growth rate of 11.76%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. It's important to keep in mind that not all companies provide a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, PAYX presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).

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