For income investors, finding a stock that delivers a high yield is important, but you also want to make sure you can trust it to deliver for the long run. That requires looking at a few different metrics, like the company's revenue and earnings, its cash and liquidity position, its dividend payout ratio, its dividend history, and where it's headed.

One stock that checks off all these boxes is Principal Financial Group (PFG -1.87%). Let's look at why this is a high-yield stock you can trust.

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A huge first quarter

Principal Financial is a financial services firm with three primary lines of business: insurance, investment management, and retirement-plan administration. It is coming off a strong first quarter with $517 million in net income, almost twice the $289 million generated in the first quarter of 2020. The gains were led by its two largest segments:

  • Retirement and income solutions -- which provides record-keeping and administration services for companies' retirement plans, as well as annuities for individual investors -- saw earnings jump 41% to $288 million.
  • Principal global investors -- which manages mutual funds, exchange-traded funds (ETFs), and institutional assets -- posted $141 million in earnings, up 25% year over year. It finished the quarter with $8.2 billion in net flows into its funds and a record $820 billion in assets under management.

Meanwhile, Principal International, which provides a range of financial services to international clients, saw earnings more than double from $31 million to $75 million. The only business line that saw a decline was U.S. insurance solutions, where earnings dropped 25% to $95 million.

For the full year ended March 31, Principal saw earnings increase 29% to $1.6 billion. Over the last 10 years, earnings have climbed about 10% annually while revenue has increased about 5% annually.

A consistently rising dividend with a high yield

The steady earnings have allowed the company to increase its dividend annually over the past eight years. In the second quarter, it raised its quarterly dividend 9% to $0.61 per share for a yield of about 4%, which is more than twice the average of the S&P 500.

A good measure of the safety of that high yield is the company's payout ratio, which refers to the percentage of annual earnings it uses to pay dividends. Principal has a payout ratio of about 39%, a good, sustainable percentage. When the ratio gets too high (say, over 60%), it means the company might be paying too much in dividends, possibly to the detriment of other areas of the business.

Through the end of the first quarter, Principal had about $2.8 billion in excess capital, a total that has been steadily rising. That type of liquidity helps the company maintain its rising dividend.

A bright future

Principal's stock is up 25% year to date at Wednesday's prices and is trading at only 10.5 times earnings, with a price-to-book ratio of only 1.1. Based on those numbers and its consistent earnings, it is trading at a low valuation.

But there are other reasons to watch Principal. Last year, it acquired Wells Fargo's institutional retirement and trust business and is in the process of integrating it into its Retirement and Income Solutions segment. With the acquisition from Wells Fargo, Principal will be one of the three largest retirement-plan record keepers in the country.

Principal has also been ramping up its investment management, recently launching three new multifactor ETFs (these focus on companies within an index that meet various screens or factors; for example, value, quality, and volatility). This business has been buoyed by strong investment performance, with 89% of its funds and accounts ranking above the median.  

The focus on these two profitable and growing businesses is part of a strategic shift by the company. In February, Principal signed a settlement agreement with activist investor Elliott Investment Management to add two new directors to its board and conduct a strategic review. There is speculation that Elliott would like to see the company focus on its more-profitable businesses and perhaps spin off its life insurance business. Thus far, the market has reacted favorably to the agreement with Elliott.

So there is a lot to like about Principal Financial right now, particularly its dividend.