If you want reliable dividends, you should look for companies that are good at what they do and have proven it for a long time. The financial sector is an excellent place for these types of companies. Money and the way it flows between people and businesses is a multi-billion dollar pillar of the economy and one of humanity’s oldest professions.
The core of the financial sector consists of sectors such as payments and insurance. Companies like it Chubb (NYSE:CB), MasterCard (NYSE:MA)And Aflac (NYSE: AFL) have been flourishing for decades, which coincides with their impressive dividend track records.
What makes these companies so good, and why should long-term dividend investors consider buying them and holding them forever?
P&C stands for property and casualty insurance, a broad category that includes insurance against financial losses to one’s own property or the financial losses to others for which one is liable. Examples of non-life insurance include home, car and renters insurance.
Chubb is the world’s largest publicly traded property and casualty insurance company. It underwrites and sells insurance to individuals and businesses worldwide, including 54 countries and territories.
Insurance is simple: people and businesses pay premiums to insurance companies for the protection they need. The insurance company bundles all its premiums together (a so-called float), which it invests to generate income and from which it draws to pay claims when necessary. An insurance company is profitable if its premiums are more than sufficient to cover its claims obligations and the company’s operating costs.
For example, Chubb’s combined ratio has averaged 89.9% over the past decade, compared to an average of 97.5% for its peers (a lower ratio is better). In other words, Chubb’s efficient adoption makes the company more profitable than its competitors.
This expertise has helped Chubb grow and share more profits with investors. The company has paid and increased its dividend for 31 years in a row – even during disasters, recessions and the pandemic. While the 1.2% yield is in line with the S&P 500 average, the company’s excellent A+ credit rating should give investors plenty of peace of mind.
Chubb’s track record and clean financial health eventually caught the attention of Warren Buffett, whose holding company Berkshire Hathawaybegan investing in Chubb last year.
Mastercard is one of the few companies that dominate the debit and credit card payments industry. The network acts like a toll booth and charges a fee every time someone uses their Mastercard card to make a payment.
While arch rival Visa is the market leader to the extent that it recently came under antitrust scrutiny, Mastercard has done well as a runner-up. The company has achieved competitive returns since the stock’s initial public offering in 2006.
The company is growing faster than it takes to invest in the business, so the cash profits continue to pile up. Over the last four quarters, Mastercard generated $11 billion in free cash flow (what’s left of cash flow after capital expenditures) on $26.4 billion in revenue. That money goes toward stock buybacks and dividends.
Although the 0.5% dividend yield is low, Mastercard has increased its payout for thirteen years in a row, including an average growth rate of 18% over the past five years. That level of dividend growth will escalate your dividend income over time.
As Mastercard continues to grow rapidly, the dividend is only 18% of the company’s estimated 2024 profits. Analysts believe Mastercard’s profits will grow at an average rate of 15% per year over the next three to five years. Thanks to its robust growth and small dividend payout ratio, Mastercard should continue to grow its dividend by double digits for a long time to come.
Aflac sells cancer and health insurance in Japan and is a leading provider of supplemental insurance in the US. Supplemental insurance protects against financial loss not covered by a primary insurance plan. Aflac sells supplemental insurance for accident, healthcare, dental, disability and more.
The company measures its profitability by its return on equity, which averages almost 16% and has never fallen below 10% over the past decade. That’s a high return that has helped Aflac over the years.
As with Chubb, investors can rely on Aflac’s dividend growth record as a reflection of the company’s ability to consistently operate at a high level and deal with setbacks when they arise. Aflac has paid and increased its dividend for 41 years in a row. Do you want a vote of confidence from management? Aflac’s most recent increase was up 19%, giving the stock a 1.8% return.
In the long term, Aflac is poised to continue paying and increasing its dividend. Not only is the company doing well, but there is also room for expansion. The market for supplementary insurance in the US is growing at a rate in the single digits
Aflac should remain a fixture in Japan, where the aging population may continue to turn to Aflac to cover costs that the country’s healthcare system cannot afford. Moreover, the dividend itself has a lot of breathing room.
Aflac currently spends around 30% of the capital it returns to shareholders on dividends, with the rest going towards share buybacks. The company seems like a lock to eventually become a Dividend King.
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*Stock Advisor returns October 21, 2024
Justin Pope has positions in Visa. The Motley Fool holds positions in and recommends Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends Aflac and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
Do you want passive income for decades? 3 Stocks to Buy Now and Hold Forever was originally published by The Motley Fool
