Dividend stocks are an excellent source of income, especially for retirees. In their search for dividends, investors want to look for companies with a stable source of income and a history of consistent payouts. If you can find a business that consistently raises its dividend year after year, that's even better.

Cincinnati Financial (CINF -0.17%) is a property and casualty insurer that has weathered a variety of market conditions in its history. What makes Cincinnati Financial special is the fact that it has increased its dividend payout for 61 years straight. That's right -- for over half a century, Cincinnati Financial has consistently increased its dividend payout, something only a handful of companies can brag about.

Its track record of dividend payouts is so strong that it's not just a Dividend Aristocrat, a name for S&P 500 stocks that have increased dividends 25 years in a row. Instead, the company finds itself in a more exclusive club of Dividend Kings, S&P 500 companies that have increased their dividends for 50 years straight. Just 27 companies in the entire universe of stocks can tout such an impressive track record, and only eight of them have increased dividends more consecutive years than Cincinnati Financial.

Man holding a stack of cash.

Image source: Getty Images.

What it does

Cincinnati Financial is a property and casualty insurer headquartered in Ohio. The company generates income from underwriting insurance and reinsurance policies, and then uses any excess proceeds to invest in stocks and bonds. The company works with independent insurance agents to market and sell its policies, partnering with over 1,848 agencies that sell on its behalf. The company does business in 45 states and earns 14.8% of its premiums from sales in Ohio, followed up by Illinois, Georgia, and North Carolina, making up another 5% each.

A majority of Cincinnati Financial's premiums come from commercial lines of insurance, generating $3.5 billion in premiums and accounting for 57.1% of the company's total written premiums in 2020. Another $1.5 billion in premiums comes from personal lines of insurance, accounting for another 24.3% of its written premiums last year.

Effective capital management is key in the industry

Cincinnati Financial has done a stellar job of managing its capital, which allows it to grow premiums by underwriting more policies, invest in its employees and infrastructure, and put excess cash to work in the market to generate added investment income and gains. Thanks to disciplined underwriting and strong cash management, the insurer has managed to not only maintain but increase its dividend payout for 61 years consecutively.

Last year was a perfect example of how the company's capital management allowed it to weather the storm. The global pandemic threw the economy into a tailspin, and Cincinnati Financial was not immune to its effects. In 2020, the company saw its total revenue drop to $7.5 billion, a drop of 4.9%, partly driven by a decrease in investment gains when compared to 2019.

While the company increased earned premiums on the year by 6.7%, to nearly $6 billion, it also faced an uptick in insurance losses, which were $4.1 billion, or 13.6% higher than the year prior. The larger catastrophe losses incurred during the year were due mostly to severe weather conditions; pandemic-related losses were the second biggest expense during the year. As a result, the company saw its net income drop to $1.2 billion, down nearly 40%.

Stability despite an uncertain environment

Last year was tough for Cincinnati Financial and other providers of property and casualty insurance. The insurer felt the pain from different catastrophe events on top of the pandemic, including Hurricane Laura, tornadoes in Tennessee, and the bombing in Nashville, to name a few.

Despite the challenging environment, the company maintained a combined ratio of 98.1%. In the insurance industry, the combined ratio is a calculation of total losses and expenses divided by total earned premiums. Insurance companies want to see a ratio under 100% because it means the policies they are underwriting are profitable. The insurer estimates that catastrophe losses caused the combined ratio to be 10.4% higher, a high contribution when you consider that the two years prior saw catastrophe losses add 1.9% and 4% to the combined ratio. The insurer has maintained a profitable combined ratio for years, averaging 96.1% over the past five years.

Not only that, but Cincinnati Financial has shown a steady growth in earned premiums as well. In the past five years the insurer has increased earned premiums by a compound annual growth rate of 6.2%, above average in its industry.

This Dividend King is a great income stock

This financial stability has allowed Cincinnati Financial to increase its dividend payout every year for 61 years now. The insurer's capital management ability has allowed it to weather difficult conditions like those seen last year, and increase its dividend despite the environment.

The company's payout ratio spiked over 400% early in 2020, due to the hit on its income statement at the time. However the payout ratio has come down to a much more manageable 30.8% as of the recent reporting quarter. A ratio under 50% is a good sign that the company will be able to maintain and grow its dividend going forward.

A solid payout ratio, steady premium growth, and a solid combined ratio shows the company's strong capital management and its commitment to dividend raises. This, coupled with its 2.4% yield, makes Cincinnati Financial one stellar income stock for a retiree's portfolio.