creme de la creme
of the income universe.
Each one has increased itsdividend every year for at least two
decades... some sport track records with more than 50 years of
consecutive dividend increases.
All told, thesestocks are some of the most reliable dividend
payers on the planet.
I'm talking about the S&P 500 "Dividend Aristocrats " and
their kissing cousins, the S&P "High-Yield Dividend
To become a member of these elite groups, a company must pay a
regular dividend, but it must also enjoy a stellar track record of
growing that dividend every year for at least 20 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 ofconsumer staples such as
Procter and Gamble (
Kimberley Clark (
, and a healthy chunk of electrical utilities, such as
Consolidated Edison (
Northwest Natural Gas (
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
What is it about property and casualty insurers that allow 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.Liability insurance is a common
You might expect property and casualty insurers such as Dividend
-- to be cash-flow machines... churning out streams of highly
predictableearnings 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 effect
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
ofunderwriting profit .
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. During the third quarter 2012,
RLI's combined ratio was 87.7 -- ticking up because of damage
caused by Hurricane Sandy.
RLI has seen sixteen straight years of underwriting
profitability, with an average combined ratio of 87 during the
And while property and casualty companies may break even or
losemoney on their underwriting activities... that is only part of
their financial story.
These companies accumulate millions and even billions of dollars
ofinvestment 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 average "AA"credit rating , and 26% inequity .
Given the investment portfolio comprises the lion's share of
earnings, management's decision on whether realize capital gains or
losses by sellinginvestments can cause tremendous earnings
volatility from year to year.
How can volatile earnings grow dividends?
First, insurance companies keep theirpayout ratio 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
Meanwhile, insurance companies keep building shareholders'
equity, which they can dip into on a temporarybasis 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 146
consecutivequarters and raise itsordinary dividends for 38
For the past three 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 a share and in
2011 and 2012, it was $5 a share.
During the last four quarters, the company paid out $1.26 in
ordinary dividends. Factoring in last year'sspecial dividend
,shares of RLI provide a remarkable yield of 9.2% at today's price
-- an outstanding yield for a member of the "Dividend
That also makes it the highest-yielding "Dividend
Risks to Consider:
If management decides to break with its three-year policy of
paying out a special dividend from excess capital, thestock would
no longer be suitable as a high-yield income play.
Action to Take -->
With 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, then an insurer
like RLI may be suitable for you.
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