As an auto insurance specialist, Progressive (PGR -1.45%) hasn't been hit as hard by the COVID-19 pandemic as others in the industry, particularly health and life insurers. Its year-to-date returns of 27% through the close of trading Monday blow away the average insurance stock, which is down about 17% this year.

But as great as that's been for shareholders, income investors have another question: What about its dividend? Is Progressive a great dividend stock?

An insurance agent holding a pen and a policy

Image source: Getty Images.

Good second-quarter results

As mentioned, Progressive is primarily an auto insurer, with about two-thirds of its 24 million policies in personal auto lines. Unlike the major life and health insurers, auto insurance companies have not been hit hard by claims during the COVID-19 pandemic. In fact, Progressive has benefited from all the stay-at-home orders; with fewer drivers on the road, it's had to process fewer accidents and fewer claims. Driving miles have slowly gone up in recent months -- and might go up further as schools reopen -- but are still below pre-pandemic levels.

The decrease in travel led to a 10% increase in net premiums in July, and a 111% jump in net income in July, year over year, to $812 million. Also, the insurer's combined ratio -- a key profitability metric -- has decreased 6.8 percentage points to 83.5%. The combined ratio measures how much the company pays out in claims versus how much it takes in in premiums. Anything under 100% indicates profitable underwriting -- and 83.5% is excellent.

Progressive has been steadily increasing its earnings and customer base over the years, and its 11% market share makes it the third-largest auto insurer, behind State Farm and Geico (which is owned by Berkshire Hathaway). Last year, Progressive had the biggest market-share gain of all auto insurers -- about 1.2 percentage points. Since 2000, only Geico has had a larger market share increase.   

These are all good numbers, but do they support a great dividend?

A great dividend?

Before 2019, Progressive had only paid out a variable annual dividend, based on the company's annual underwriting earnings. For 2020, the annual dividend was $2.25, paid in January 2020, in addition to a $0.10 quarterly dividend. The year before, the annual payout was $2.51, in addition to the quarterly dividends.

However, under the new dividend policy, established in 2018, the company also declares a quarterly dividend in addition to the variable dividend. Progressive recently approved a $0.10 quarterly dividend for the third quarter, payable to shareholders on Oct. 15. This is the level it has held for the past two years. So for 2020, shareholders got $2.65 per share, including the four $0.10 quarterly dividends and the one special annual dividend.

Back in 2018, CFO John Sauerland discussed the new policy on the fourth-quarter earnings call:

Interestingly, when you look at our dividend yield over a longer period... our dividend yield is fairly robust. So we are certainly a growth stock, but we also probably don't get the attention from a broader potential ownership set due to our sole reliance on variable and special dividends. Consequently, we are adding a quarterly dividend that will start at $0.10 a share for this quarter in addition to an expected annual variable dividend. So that, at a high level, is a rationale for the dividend change.

The dividend yield is just 0.44% for the quarterly dividends, but the yield for the annual payout is about 3%. The payout ratio is about 6.21%, meaning the company only pays out 6.2% of its earnings in dividends.

So, ultimately, Progressive is definitely a stock you should consider adding to your portfolio, based on its strong earnings history and market share gains. If you look at earnings before the pandemic hit, they were strong, but they have definitely seen a boost since the pandemic. For example, net income in the second quarter was about $1.8 billion, compared to about $1 billion in the fourth quarter of 2019. It's likely that once drivers return to the road, the earnings increases will revert back to normal levels -- which for Progressive, has been very good.    

As for its dividend: Progressive doesn't have a long track record under this new policy, and the variable annual dividend is well, variable. It's a good, solid, sustainable dividend, but I wouldn't call it a great dividend. A better dividend stock among insurers is Prudential Financial (PRU 1.40%), which pays out a $1.10 quarterly dividend (that currently yields 6.5%). But then again, Prudential hasn't had the type of returns that Progressive has had.