In 2016 I am looking for a solid stock, one that could withstand a major market disruption. More than just safety, I need yield and yield growth. To boost yield I need a stock highly likely to provide covered call income. Simple stuff right?
This post presents the Dividend stock fundamentals of my most recent 2016 portfolio addition. I already own this stock and I am up about 10% since July 2015 not including dividends. With dividends added in I am up 12.3%. I have not sold any calls on PAYX.
I added PAYX to the 2015 Dividend Machine Model Portfolio in July 2015. http://www.themoneymadam.com/2015/07/paychex-symbol-payx-next-2015-dividend.html That portfolio is long only. Whereas in 2016 I will record actual sales as a result of calls being assigned but otherwise, the 2016 portfolio is also long only.
Paychex 2016 Fundamentals
In the table below you will see the data I used to evaluate Paychex. Earnings are greater than dividends paid $2.04 EPS and $1.68 annual dividend payout. Dividend yield is 3.2% which is very nice for income investors and dividend growth over the past five years has averaged more than 6% per year. Even more good news for income investors. Debt to equity ratio (D/E) is 0. Paychex has virtually no debt. So far we have a good dividend stock that would seem to be a safe bet.
Notice a couple of things from that table. First look at revenue growth. I am looking for, and believe me it is hard to find, a stock with revenue growth at least 4% year over year (y/y) for the past 3 years. PAYX has double their revenue growth 8.70%. Next look at the failure of PAYX to solicit covered calls. Technically this is a failure but like, WSO, I will wait for some volatility to occur and a covered call to come our way.
Open interest and put/call ratios are a couple of ways to determine if you think a stock will have a future with covered calls available. Here is a link to a site that writes about call/put activity. https://www.marketnewsvideo.com/article/201510/first-week-of-june-2016-options-trading-for-pay This article written in October 2015 points toward the call opportunities of PAYX. I am hoping this opportunity will come up again soon. I see a September $55 call for $.90 but the call expiration date is too far out and the strike price is too low.
In the interim, we have a stock paying not just income, but income that is highly likely to continue to grow while we are paid for yield boosting covered calls and future capital gains.
While I do not technically use other factors to make my decisions to add stocks to my model portfolios, I do like the business. As all employers know, managing your payroll and making sure you do not run afoul of a myriad of regulatory requirements is a daunting task. The need for a professional service to manage this part of running a business will grow. Moreover, Paychex is not a one trick pony. They also offer retirement and insurance services.
Consider Paychex, PAYX, for the income producing portion of your stock portfolio.
Disclosure: Long PAYX
Disclosure: Long PAYX