Dividend stocks can provide relatively stable sources of passive income for investors -- funds that they can use to pay bills or reinvest in the stock market.
Today's investors must consider inflation, rising interest rates, and a potential economic recession. In this environment, the best companies to invest in are those with steady cash flows, strong balance sheets, and proven histories of performing well in challenging markets. Dividend King Cincinnati Financial (CINF -1.23%) qualifies on all of those fronts, and is a smart buy today.
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More than six decades of annual dividend hikes
Cincinnati Financial is a top insurer writing homeowners, automotive, and property policies for businesses and individuals. And when it comes to growing its dividend payout, Cincinnati Financial is one of the best.
For 63 consecutive years, the insurer has increased its dividend payout, earning it a place among the elite group known as Dividend Kings. Only eight companies in the U.S. market have longer streaks of payout hikes.
Over the past decade, Cincinnati Financial has outperformed the S&P 500, returning investors 268% vs. 218%. Since the start of 2022, the stock has returned 9% versus a loss of 15% in the S&P 500. While Cincinnati Financial has performed nearly in lockstep with the S&P 500 over the last decade, its business has performed quite well this past year and can continue to do so if inflation and interest rates remain higher for longer than expected.
Cincinnati Financial is well-positioned for inflation and rising interest rates
Insurance products are always in demand as people want to protect themselves from losses, while laws often require them to have coverage. Because of this, insurers can adapt to rising costs by increasing the premiums they charge customers. Berkshire Hathaway Chief Executive Officer Warren Buffett has characterized the conglomerate's insurance businesses as a key component of its long-term success. Insurance, he noted in his 2021 letter to shareholders, "will never be obsolete, and sales volume will generally increase along with both economic growth and inflation."
With its array of insurance products, Cincinnati Financial is well-positioned to thrive under the current economic conditions. Despite inflation, rising interest rates, and a potential recession, Cincinnati Financial's earned premiums have grown 12% in the past year and nearly 22% since 2020, outpacing inflation.
Free cash flow is crucial to a company's success in a rising interest rate environment. That's because companies can use this cash to pay down debt, reward shareholders through dividends and share repurchases, or reinvest in the business. Over the past 10 years, Cincinnati Financial's free cash flow has grown at an average rate of 13% annually and nearly 58% in the past two years.
CINF Free Cash Flow Per Share data by YCharts
The insurer has weathered its share of storms
Cincinnati Financial has done a stellar job of writing profitable policies and has generated underwriting income for 11 consecutive years. Before that, from 2008 to 2011, things were a little more difficult for the insurer. Its policies lost money overall, and its free cash flow dropped by 19% over that time. Despite these challenges, Cincinnati Financial managed its capital well and continued to boost its dividend payouts (modestly) even as most others in the insurance industry slashed them.
CINF Dividend data by YCharts
Buying this dividend stock today is a wise move
At its current share price, Cincinnati Financial's dividend yield is 2.4%, and it has several tailwinds working in its favor. First, inflation has made for a favorable pricing environment for insurers, which is why its premiums grew by a double-digit percentage during the year.
Second, it is positioned to take advantage of a challenging stock market. It's on solid footing financially with its strong cash flows, and it can use its cash to invest in stocks at low valuations and bonds while interest rates are high (relative to recent history). These investments will ultimately boost Cincinnati's long-term net income when the stock market eventually recovers.
If you're an income investor looking for a reliable stock that consistently delivers, Cincinnati Financial is a smart choice.
