Tuesday, April 26, 2016

Adding Paychex to 2016 Dividend Portfolio

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.

M* TheMoneyMadam

Disclosure:  Long PAYX