Dividend stocks can be a great source of returns when investing in the stock market.
According to Fidelity, 40% of the S&P 500's returns since 1930 have come from dividends. When inflation is high, dividend stocks really perform. During the 1940s and 1970s, which saw high inflation levels, dividend stocks accounted for as much as 71% of the S&P 500's total returns.
If you are looking for dividend stocks to diversify your portfolio, one worth considering is Aflac (AFL 2.31%). When the pandemic initially emerged, the company saw its business dip. However, with the rollout of vaccines and the easing of pandemic-era restrictions, the insurer's business could get a boost -- and it sits on a pile of cash, ready to reward investors.
Aflac is helping people pay for unexpected health events
People don't want a health scare to crush them financially, which is where Aflac comes in. Businesses seek out Aflac to provide employee benefits that expand beyond traditional health insurance. The insurer covers millions of people across the United States and Japan through its life insurance and supplemental health insurance policies.
Aflac writes various policies covering dental and vision, cancer, and critical illness insurance, which pays benefits to people who have life-altering events like heart attacks or strokes.
Image source: Getty Images.
The pandemic hurt Aflac, but things are looking up
Aflac felt pressure from the pandemic, which caused millions of people to lose their jobs and employee benefits. As a result, Aflac's sales dropped 31% in the U.S. and 36% in Japan in 2020.
Aflac's recovery has taken some time. First-quarter total earned premiums declined 9% from the year before, as premiums earned in the U.S. were in line with last year. Its Japan segment saw premiums decrease nearly 13% in U.S. dollar terms. Part of this decline is due to the weakening of the Japanese yen compared with the U.S. dollar -- earned premiums in the Japanese yen were down 4.3% by comparison.
Aflac sees sales in Japan picking up in the second half of this year, driven by easing restrictions relating to the pandemic. Japan's government had strict measures that it lifted on March 21.The insurer saw U.S. markets recover to pre-pandemic conditions, but cited challenges as employees rapidly changed jobs. Despite this, Aflac saw new sales increase 19% from 2021 in the first quarter, with dental and vision sales up 48% and disability sales up 22%.
A pile of cash and four decades of increasing dividends
Dividend Aristocrat is a title given to companies in the S&P 500 index that have increased their dividend payment annually for at least 25 consecutive years. Aflac recently increased its dividend payment for the 39th straight year, reaffirming its membership in this exclusive club.
Increasing dividends every year is only possible by managing capital effectively, and Aflac checks that box. Aflac has a strong balance sheet with over $132 billion in investments and cash, which is why the company could increase its dividend 21% in the first quarter.
The payout ratio is a metric that tells you how sustainable a dividend is. It measures a company's dividends divided by total earnings and the higher the ratio, the harder it is for the company to maintain that level of payouts without borrowing to fund the payout. A safe payout ratio for a mature company in a stable industry is generally any percentage under about 70%. Aflac's payout ratio is about 22% and hovering near its 10-year average of 23%. That suggests the company has plenty of free cash to fund the dividend and should have no problem increasing its payout going forward.
AFL Dividend data by YCharts
Aflac's a good stock at a cheap value
AFL PE Ratio data by YCharts
Aflac trades at a cheap price-to-earnings ratio (P/E) of 9.8, below its historical average of 14.1. It could be a solid dividend stock to add at a good value, assuming another wave of the COVID-19 virus doesn't flare up and the U.S. and Japanese governments don't reinstate pandemic-related restrictions.
