They're the creme de la creme of the income universe.
Each one has increased its
every year for at least two decades... some sport track records
with more than 50 years of consecutive dividend increases.
All told, these stocks are some of the most reliable dividend
payers on the planet.
I'm talking about the S&P 500 "
" and their kissing cousins, the S&P "High
To become a member of these elite groups, a company must not only
pay a regular dividend, it must also enjoy a stellar track record
of growing that dividend every year for at least 25 years.
With such stringent membership criteria, only about 70 U.S.
companies make the grade.
As you'd expect, a wide variety of industries are represented.
You'll find an overweighting of
Procter and Gamble (NYSE:
Kimberley Clark (NYSE:
, and a healthy chunk of electrical utilities, such as
Consolidated Edison (NYSE:
Northwest Natural Gas (NYSE:
But there's one group that makes the list that you would probably
never expect: insurance.
All together, six of some 70 aristocrats sell insurance. Even more
interesting, five of these six companies are property and casualty
insurers. The exception is Aflac, which is mainly a life insurer.
What is it about property and casualty insurers that allows them to
keep increasing their dividends in good times and bad for at least
a quarter of a century?
The answer surprised me. Here's what I found out...
Today, insurance is usually life or non-life, also known as
property and casualty. Property insurance covers loss or damage to
physical property, such as houses and cars. Casualty insurance
covers the legal cost if the insured person were to cause someone
else physical injury or damage another's property.
insurance is a common example.
You might expect property and casualty insurers such as Dividend
-- to be cash-flow machines... churning out streams of highly
quarter after quarter.
Nothing is further from the truth.
Their earnings streams are notoriously volatile. Major
unpredictable risks, such as natural disasters, have a huge impact
So why do I like property and casualty companies then? As in all
industries, some companies far outperform others. RLI is one of
them -- as measured by the combined ratio, the key industry metric
The combined ratio combines two metrics. It measures underwriting
expenses as well as the amount paid out in claims, both as a
percentage of net premiums earned.
A combined ratio of 100 means the company is breaking even on its
underwriting activities. The lower the ratio, the higher the
company's underwriting profit.
In 2011, RLI's combine ratio was an outstanding 78.4... Well below
the industry average of 107. RLI has seen sixteen straight years of
underwriting profitability, with an average combined ratio of 87
during the period.
And while property and casualty companies may break even or lose
money on their underwriting activities, that is only part of their
These companies accumulate millions and even billions of dollars of
investment capital, which provides investment income that makes a
vital contribution to their per-share earnings.
For example, RLI earns investment income and realizes gains from a
$1.9 billion portfolio, comprised 74% of high-quality debt with an
, and 26% in equity.
Given that the investment portfolio comprises the lion's share of
earnings, management's decision on whether or not to realize
capital gains or losses by selling investments can cause tremendous
earnings volatility from year to year.
How can volatile earnings grow dividends?
First, insurance companies keep their
relatively low, so it can inch up the dividend regardless of
earnings. RLI had a payout ratio of 25.0% of in 2009, 19.2% in
2010, and 19.5% in 2011.
Meanwhile, insurance companies keep building shareholders' equity,
which they can dip into on a temporary basis to supplement the
dividend if there were a short-term earnings shortfall.
That's one reason RLI has been able to pay a dividend for 144
consecutive quarters and raise its ordinary dividends for 37
For the past two years, the insurer has also returned excess
earnings to shareowners in the form of one-time special dividends.
In 2010, the special December payout was $7 and in 2011 it was $5.
In the past four quarters, the company paid out $1.14 in ordinary
dividends. Factoring in last year's
of RLI provide a remarkable yield of roughly 9.8% at today's price
-- an outstanding yield for a member of the "Dividend Aristocrats."
Risks to Consider:
Of course, as with every investment, there are risks to be
considered. If management decides to break with its two-year policy
of paying out a special dividend from excess capital, the stock
would no longer be suitable as a high-yield income play.
Action to Take -- >
But that said, many insurance companies have a surprisingly good
track records when it comes to dividend payouts. If you're looking
for a high-yield stock with a reliable dividend track record, then
an insurer like RLI may be suitable for you.
-- Carla Pasternak
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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