American business tycoon John D Rockefeller, who was at one point worth an estimated $700bn (that’s not a typo), once remarked, “do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Most income investors have the same love of dividends as the multi-billionaire business tycoon, and rightly so, as dividends are the bread and butter of every portfolio.
High-quality high yielding stocks are pretty rare. It’s easy to find one, but finding one with a high dividend yield that’s sustainable for the long term is rather difficult. Income investors have been dealt several blows over the past few years with what were perceived to be dividend champions slashing their dividend payouts as business performance deteriorated.
Insurance income
Insurance companies have always been great income investments, that’s why billionaire Warren Buffett built his empire at Berkshire Hathaway around a core of insurance names. These businesses are essentially investment companies and often have large investment portfolios built up over the years to generate additional returns on top of income from insurance sales. With that income and income from the investment portfolio coming in, assuming the insurers’ risk managers have done their job, more often than not insurance companies end up generating excess cash, which can be returned to shareholders.
Direct Line (LSE: DLG) and Admiral (LSE: ADM) are two prime examples. Between 2010 and 2015, Admiral returned a total of £1.1bn to investors via both regular and special dividend payouts. This works out as around 90% of Admiral’s net income generated over the period, and the company is showing no signs of slowing down.
In August Admiral announced it was increasing its first-half dividend payout by 23% after a big jump in its strong solvency ratio, which has allowed it to return an extra £33m to shareholders. For the first half, turnover at the company’s core UK motor insurance business rose 16%, and City analysts are forecasting 2% earnings per share growth for the full year. The company is on track to return 121.3p per share to investors via dividends this year and 125p next year for a yield of 6.4% and 6.6% respectively.
Back in August Direct Line announced that its capital ratio was a solid 199% and regulators have given the company the green light to lower this figure to 140% to 180%, which gave management the confidence to hike the company’s dividend substantially. For this year, analysts are expecting the company to return 32.1p per share to investors for a dividend yield of 9% at current prices.
Next year, the payout is expected to drop back to 26.4p per share, but this still implies a dividend yield of 7.4%, around double the market average. All in all, Direct Line and Admiral are two very attractive dividend champions that can boost your portfolio’s income.
