This Ultra-Reliable Dividend Stock Is About to Hit the Buy Zone

Some investors are swashbucklers. They have a high tolerance for risk and can take all the punishment the market dishes out.

Not me! I’m a champion worrier. In fact, I’m never more worried than when everything seems to be going right.

That’s why I’m a utilities guy first and foremost. At Investing Daily’s Utility Forecaster, I focus on the least-risky sector of the stock market. And I sleep soundly at night while a steady stream of dividends flows into my brokerage account.

Recently, I took over the Income Portfolio at Investing Daily’s flagship newsletter, Personal Finance. And that means I’m no longer limited to a single sector—I can search for attractive yields in every corner of the market.

Nevertheless, as a utilities guy I’m still fixated on safety first. So I want stocks that offer steady earnings and dividend growth through thick and thin.

Basically, I’m looking for companies that boast many of the same characteristics as a utility without necessarily being a utility.

The types of companies that can achieve this feat tend to have commanding market shares in recession-resistant industries. They also generate copious cash flows while keeping debt in check.

As you can imagine, there aren’t all that many companies that fit the bill. And when investors find such a company, they pile into its stock, pushing up the share price until it’s too expensive for skinflints like me.

While I’m never happier than when I can find beaten-down shares of high-quality stocks for my subscribers, when it comes to value sometimes I have to relax my stringent criteria.

Don’t get me wrong: I’ll still scrounge for every percentage-point discount I can get. But I’m also pragmatic.

Income from Income

For example, one stock that I’m closely monitoring is Paychex Inc. (NSDQ: PAYX).

The $20 billion payroll processor offers a crucial service to small businesses by handling all the hassles involved with administering employee compensation and benefits.

Because Paychex operates in a mission-critical area for small businesses, the company enjoys a high level of customer retention, so profits tend to hold up better during downturns than those of companies in other industries. Earnings declined just 13% during the worst year of the Great Recession.

Earnings per share are expected to continue growing around 8% annually for the foreseeable future, driving dividend growth of nearly 7% annually over the same period.

Strong dividend growth comes courtesy of a high-margin business that generates incredible cash flow. Profit margins have averaged around 25% over the past three years, while free cash flows have averaged $852.7 million over the same period.

Equally impressive: Paychex doesn’t carry any debt.

Shares of the stock currently yield 3.6% on a forward basis, and Paychex has grown its dividend by nearly 10% annually over the past three years.

Many investors are likely also familiar with Automatic Data Processing Inc. (NSDQ: ADP), a $50 billion company that provides similar services for larger firms.

However, Paychex’s profit margins are nearly double those of ADP, while its stock offers a much higher yield. Meanwhile, both companies seem content to dominate their respective niches, so Paychex is largely insulated from competition.

Value at a Premium

The only problem right now is price. Because of its many attributes, Paychex has long traded at a premium to the market. And that premium is unlikely to go away. But recently, the premium has been narrowing as Paychex rapidly approaches its long-term average valuation.

The stock has been selling off in part due to Wall Street’s increasing skepticism about whether it—and ADP—deserve to trade at such high valuations.

Critics note that both companies have benefited from helping customers comply with Obamacare, a tailwind that may moderate in the years ahead, particularly given the political risk the healthcare program faces.

But analysts have been lukewarm on both stocks for years at this point—even as both companies continue to grind out earnings and dividend growth, driving further share-price appreciation. Gee thanks, analysts!

ADP is down nearly 11% from its trailing-year high, and inching ever closer to the level where I would seriously consider hitting the “Buy” button.