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This is Why Paychex (PAYX) is a Great Dividend Stock

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Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Paychex in Focus

Based in Rochester, Paychex (PAYX - Free Report) is in the Business Services sector, and so far this year, shares have seen a price change of -1.32%. The payroll processor and human-resources services provider is currently shelling out a dividend of $0.56 per share, with a dividend yield of 3.33%. This compares to the Outsourcing industry's yield of 0.98% and the S&P 500's yield of 1.9%.

Looking at dividend growth, the company's current annualized dividend of $2.24 is up 8.7% from last year. Paychex has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 9.80%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Paychex's current payout ratio is 90%. This means it paid out 90% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, PAYX expects solid earnings growth. 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.

High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that PAYX is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).

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