Help Insure Your Portfolio With This Overlooked Insurance Stock

Income investors have had a difficult journey in the years since the financial crisis. Ever since the Great Recession of 2008, finding satisfactory yield has been a challenge. The Federal Reserve’s monetary easing policies, including historically low interest rates, have helped elevate asset prices. But the cost of these policies is extremely low yields across the board – even including fixed income.
The answer could be equities. Although investing in stocks carries risk, there are some under-the-radar stocks that have provided their investors with strong income – and even dividend growth – over many years.
Cincinnati Financial (NASDAQ: CINF) is not a household name, but it has rewarded investors with dividend increases each year for the past 55 years. The stock currently yields 3.3%, which is a solid yield in today’s low-rate environment.
Cincinnati Financial is an insurance company. It operates four main business lines: life, personal, commercial, and excess and surplus. It’s likely most investors think of the big bank stocks when they consider investing in the financial sector. But insurance companies should be held in high regard.
Insurers earn income in two primary ways: through the policies they write which generate premiums, and the income earned on their sizable investment pools. This provides for a steady stream of earnings that is more defensive than other areas of the financial sector.
Nowadays, big banks engage in riskier activities than the traditional banking business of accepting deposits and making loans. Banks have their hands in trading, investment banking and other business areas that can be volatile. And in recent years banks have had a bad habit of getting themselves in legal trouble, which costs their investors billions in unexpected legal fees.
By contrast, Cincinnati Financial’s earnings are not nearly as volatile as the big banks. From 2010 to 2014, the company grew revenue and book value by 7% and 6.8%, respectively, each year. It got off to a good start in 2015 as well. Over the first nine months, revenue from premiums increased 6% and its investment income grew 3% from the same period in 2014.
Going forward, the company will benefit from continued increases in interest rates. Cincinnati’s investment income will grow when interest rates climb, which will be a future tailwind for earnings.
Cincinnati Financial isn’t likely to produce huge growth in any given year. That’s just not the nature of the business. In exchange however, investors can earn steady returns through modest growth and a very strong dividend.

An Amazing Dividend History

Cincinnati Financial is not only a stable, profitable business, but it has one of the longest track records of dividend increases. It is one of less than 20 companies that have raised their dividends for more than 50 years in a row. That stretch of time has included many down markets and recessions – including the financial crisis – yet the company continues to increase its dividend each year like clockwork.
Cincinnati raised its dividend by 3% per year over the past five years. Its dividend growth rate isn’t phenomenal, but there is something to be said for consistency. The dividend growth rate still beats inflation, which keeps shareholders’ purchasing power intact.
Plus, Cincinnati has a habit of handing out special dividends from time to time. For instance, in December the company declared a $0.46 per share special dividend on top of its $0.46 per share regular dividend.
Future dividend growth could accelerate if interest rates are set to rise from here. The insurance stock is modestly valued at 14 times earnings. Cincinnati Financial isn’t the sexiest pick, but for risk-averse income investors, it’s a worthwhile stock.
For more worthwhile dividend plays that have stood the test of time, click here.