Dividend stocks can be an excellent source of income, but did you know they can also be less risky and deliver steady returns over time? According to a study by Hartford Funds and Ned Davis Research, since 1973, companies that raised their dividends have delivered a 10.2% annual return, outperforming the equal-weighted S&P 500 index, with lower volatility over the same period.
Companies that consistently boost their dividends tend to have strong fundamentals, solid business plans, and a commitment to returning capital to shareholders. One company that recently raised its payout is Chubb (CB -0.21%), which increased the payout for a 30th straight year, Here's why Chubb can make a solid addition to your diversified portfolio.
A long history of profitable underwriting
Chubb underwrites insurance policies and covers various risks, including auto, homeowners, and commercial insurance such as workers' compensation. The company is one of the world's largest property and casualty insurers, a testimony to its scale and ability to manage risk across the spectrum.
Insurance is a highly competitive industry, and companies must compete on their knowledge of risk and ability to price it. Chubb has an excellent track record of profitable underwriting, which is why its business is so stable.
One metric investors use to gauge an insurer's underwriting profitability is the combined ratio. This ratio shows total losses from claims plus expenses divided by premium revenue. A ratio of 100% means an insurer is breaking even, which is also about the industry average during the past decade. Over that same period, Chubb's combined ratio averaged 90%, an excellent ratio considering the industry's competition and the number of policies Chubb covers.
Stellar long-term returns
Profitable underwriting means strong cash flows, which ultimately fund Chubb's dividends, stock buybacks, and investments, making the stock more valuable over time. Last year, the insurer raked in $12.6 billion in free cash flow. Chubb's healthy cash flows and effective cash management are evident in its long history of dividend raises. For 30 years, Chubb has raised its dividend yearly -- only a small number of stocks have streaks that long.
Chubb's dividend yield is modest, at about 1.3%. However, between its stock price appreciation and the impact of reinvesting dividends, Chubb has returned investors an average of 13.4% annually during the past three decades, outpacing the S&P 500 over the same period by more than 3 percentage points. And while that difference may not sound large, when that annual growth compounds over a long period, its impact on your total returns can be enormous.
CB Total Return Level data by YCharts.
One thing to keep in mind
Like many businesses, insurers experience periods of expansion and contraction depending on supply and demand trends propelled by the broader economy and risks to it.
During the past several years, insurers have operated in what is known as a "hard" insurance market. Hard markets occur when there are high claims costs for insurers -- these can be due to a number of factors such as increasing natural disasters, rising costs from inflation, cybersecurity risks, and geopolitical instability. During hard markets, insurers face less competition and can more easily pass on rising costs to customers -- which is one reason insurers can be solid investments to hold during periods of higher inflation.
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A solid buy today
Hard markets don't last forever. As new entrants enter the insurance market and claims costs gradually decline, insurers face increased competition, which can pressure their bottom lines. However, insurers remain solid businesses because there is always demand for their products, and they can grow alongside economic expansion and inflation. Chubb's long track record of success is a testament to its ability to ride out these industry peaks and troughs.
Although this stock isn't a rapid grower producing mega returns, it offers stability to investors' portfolios thanks to its consistently rising dividend payout and the company's strong business model. For that reason, Chubb would be a solid stock to add to a diversified portfolio today.
