Why Paychex (PAYX) Is A Top Dividend Stock For Your Portfolio

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

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 (NASDAQ:PAYX) in Focus

Headquartered in Rochester, Paychex (PAYX) is a Business Services stock that has seen a price change of 0.09% so far this year. The payroll processor and human-resources services provider is paying out a dividend of $0.56 per share at the moment, with a dividend yield of 3.29% compared to the Outsourcing industry's yield of 0.48% and the S&P 500's yield of 2.02%.

Taking a look at the company's dividend growth, its 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 10.32%. 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. Right now, Paychex's payout ratio is 90%, which means it paid out 90% of its trailing 12-month EPS as dividend.

PAYX is expecting earnings to expand this fiscal year as well. 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. But, not every company offers 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. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, PAYX is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).