Dividend stocks can be a great source of returns in the stock market -- especially when inflationary pressures take hold.
According to Fidelity, dividend payments have accounted for 40% of the stock market's total return since 1930. However, dividends account for an even larger share of market returns during inflationary times. During the inflationary decades of the 1940s and 1970s, Fidelity found that dividends accounted for 65% and 71% of the S&P 500's total returns, respectively.
Dividend stocks are a great source of passive income, too. Three companies with solid dividend yields are Allstate (ALL -2.32%), Moelis & Co. (MC -0.14%), and Prudential Financial (PRU -0.91%). If you were to invest $54,000 equally in these three companies, you would make about $2,000 in income per year.
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1. Allstate: 2.61% yield
Allstate writes insurance policies on things like homeowners insurance and automotive insurance for both individuals and businesses. The company takes in money when it underwrites insurance policies and pays out customer claims for home or auto damages. In the meantime, it puts its excess cash to work in different investments for added income.
The top insurance companies measure risks properly and underwrite good, profitable policies. Allstate has done a stellar job of underwriting profitable policies, which you can see from its combined ratio. The combined ratio measures claims paid out plus operating expenses divided by premiums written. A ratio below 100% means profitability, and the lower it is, the better.
Allstate's combined ratio came in at 95.6% in 2021. This was on the higher end for Allstate in recent history, which hasn't seen a combined ratio above 96% since 2011. Due to inflationary pressures, claims were on the higher end for Allstate in 2021. The insurer faced higher claims expenses due to the higher cost of used cars, auto parts, and the higher cost of labor. It's OK, though. Insurance companies can be good to own during inflationary times due to their ability to adapt.
Companies can adjust premium costs relatively quickly, which is what Allstate is doing. The company is aggressively pursuing price increases, raising auto insurance rates across 25 markets with an average increase of 7.1%. These rate increases are applied when six-month policies renew, with the impact fully seen after 12 months. It is also looking to manage claims costs by partnering with parts suppliers and improving its analytics and predictive models. With strong underwriting results and pricing power during inflationary times, Allstate is a solid dividend stock to have in your portfolio.
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2. Moelis & Co.: 4.65% yield
Moelis & Co. is an investment bank and a trusted advisor in mergers and acquisitions, restructuring, and other capital markets work. It played a role in several big deals -- including Walt Disney's $85 billion acquisition of 21st Century Fox, CBS and Viacom's $48 million merger, and Hertz Global Holdings' $24 billion restructuring.
The firm had a blowout year in 2021. Revenue of $1.5 billion was a record for the company, growing 63% from the year before. Net income was stellar, increasing 94% from last year to $423 million.
Moelis & Co. is the No. 1 ranking restructuring advisory in the U.S. and the world and benefited from strong deal activity in what turned out to be a record year for investment bankers. There were 62,000 announced deals across the globe with deal value totaling $5.1 trillion, smashing the previous record of $4.2 trillion in 2007.
One great thing about the company is the strength of its balance sheet. The firm has cash and liquid assets of $721 million, with no debt or goodwill. This is a great sign for investors because the company can focus on paying out dividends and buying back stock. And that's just what it did.
Last year, the company declared $6.85 in dividends, including two special dividends of $2 and $2.50. Special dividends are paid once when a company has a large amount of excess cash. Including these special dividend boosts, Moelis & Co.'s dividend yield was 13.3%.
Although the pace of growth for investment banking will not continue at the same rate, analysts from the accounting firm PricewaterhouseCoopers believe the level of dealmaking will remain robust in 2022, which should bode well for Moelis & Co. stockholders.
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3. Prudential Financial: 4.07% yield
Prudential Financial is a provider of life insurance and other financial products. The coronavirus pandemic whacked life insurance companies, and Prudential was one of them. In 2020, the company posted its first net loss in seven years. The company bounced back quickly, though.
Prudential is undergoing a facelift, cutting expenses and focusing on products and services that can provide long-term growth while also being less sensitive to market conditions. The company looks to cut costs by $750 million by 2023 -- and it already made good on $590 million of those cost cuts last year.
As part of this facelift, it sold its Korea and Taiwan insurance businesses, giving it $1.8 billion in proceeds. It has also divested from its full-service business and a portion of its traditional variable annuity business, which will generate $4 billion more in proceeds.
It is putting this cash to work, making acquisitions and investments in asset management and emerging markets. Last year Prudential's asset management arm acquired Montana Capital Partners, a European-based private equity asset manager; and Green Harvest, which provides products for high net worth investors. It also acquired ICEA Lion Holdings, a financial services provider in emerging markets in Kenya.
The company is positioned well with a strong balance sheet. It has $400 billion in bonds and cash assets while also having a payout ratio of 18%, so it should have no problem maintaining its dividend.
