Dividend stocks can be a great source of income and an excellent way to increase your wealth over time. According to data by FactSet, from 1991 through 2015, dividend-paying stocks outperformed non-dividend payers 9.7% to 4.2%.
One way you can tell a top dividend stock is its history of increasing payments. A company needs to have steady earnings growth, consistent cash inflows, and strong capital management to increase its dividends regularly over time.
One stock that checks those boxes is Cincinnati Financial (CINF 2.07%). The insurer has an impressive history of dividend payments -- it's increased its payout to shareholders for 62 consecutive years. Not only does this put it in the exclusive club of Dividend Kings, but only eight other companies have a longer streak. Here's what makes this dividend stock tougher than the rest.
Why Warren Buffett loves the insurance industry
Insurance companies can be great dividend stocks because of their ability to generate cash flow, and this is one reason Warren Buffett loves the industry. Insurance businesses make up more than 25% of Berkshire Hathaway's revenue.
Insurance companies make money mainly by writing policies. They charge premiums based on how much risk they believe they're taking on and how likely they are to face a claim. It's an excellent business for cash flow because insurance is always in demand -- voluntarily in some cases, and required by law in others.
Cincinnati Financial writes policies on property and casualty coverage, mainly for commercial businesses. It also writes automotive and homeowners insurance policies for individuals, making up a smaller portion of its business.
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Why Cincinnati Financial is tougher than the rest
What makes Cincinnati Financial tougher than the rest is its ability to consistently generate cash flow from writing profitable insurance policies. From 2016 through 2020, the company has grown its written premium growth from its property and casualty insurance at a steady 6.1% compound annual growth rate compared to the industry average of 4.6%.
Growing cash flows from underwriting is critical to maintaining and growing a dividend. But insurers also have to make sure those policies they are writing are generating a good profit. Rest assured, Cincinnati Financial has been writing profitable policies for years now, as we can tell from its combined ratio.
The combined ratio measures how well an insurance company manages risk. The ratio is determined using the claims paid out plus operating expenses divided by premiums written. A ratio below 100% means profitability, and the lower, the better. Cincinnati Financial has done a stellar job of managing this risk. Over the past 10 years, the company has posted an average combined ratio of 94.6%.
The years before that were a little shakier; from 2008 to 2011, the company averaged a 104.1% combined ratio due to the weak economy and difficult environment for insurers. However, this was a blip on the radar. The insurer hired its current CEO, Steve Johnston, in May 2011 to right the ship. With Johnston's leadership, the insurer improved its predictive analytic models so that it could better evaluate risks and price policies profitably.What is impressive to me is that the company maintained its dividend raises through this tough period -- a testament to its stellar capital management.
CINF Dividend data by YCharts
It has this working in its favor
Management has found a way to bounce back after tough times over a decade ago. Cincinnati Financial is moving to ensure it maintains profitability in the competitive insurance space. In recent years, the insurer has used artificial intelligence (AI) to build on its expertise to underwrite better insurance policies while improving the claims process.
Those investments have paid off. The company credits these models with lowering its share of property and casualty losses compared to the industry in recent years. It also credits these models for helping the company avoid higher risk areas like the coast where Hurricane Ida made landfall in August 2021. This AI model was also used to quickly handle claims. For example, after Hurricane Ida, it used AI-assisted claim damage detection. By using high-resolution aerial images, it could review home damage, quickly identify customers with exterior damage, and pay losses -- before many customers returned home.
Cincinnati Financial could be solid to hold through inflationary times too. That's because insurance companies have pricing power and can adjust premiums charged in response to rising claims costs. The insurer could also benefit from rising interest rates, with its fixed-maturity investments increasing in fair value by 5% for a 1% move in short- and long-term rates.
Cincinnati Financials' stellar history of dividend payments plus tailwinds for insurers makes this one Dividend King you don't want to miss out on.
