Adding Paychex To 2016 Dividend Portfolio

| About: Paychex, Inc. (PAYX)

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 Paychex (NASDAQ:PAYX).

I added PAYX to the 2015 Dividend Machine Model Portfolio in July 2015. 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, at $2.04 EPS and $1.68 annual dividend payout. The 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, the 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 doubled its revenue growth 8.70%. Next, look at the failure of PAYX to solicit covered calls. Technically, this is a failure, but like Watsco (NYSE: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. 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 about adding 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. The company also offers retirement and insurance services.

Consider PAYX for the income-producing portion of your stock portfolio.

Disclosure: Long PAYX.