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In 1750 BC, the laws of the Babylonian King Hammurabi included what some believe to be the first written insurance policy…
“If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not grow for lack of water; in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.”
- Translated by L. W. King
If there is one common denominator among dividend aristocrats, it’s that they operate in industries that can stand the test of time.
Insurance and risk is one business that will never go out of style.
Unlike government backed bonds, dividend yields are not guaranteed.
If the stock price goes up the yield will go down, and vise versa.
However, the dividend yield can give investors a rough idea of how much cash flow to expect from dividends.
U.S. Treasury yield: Dividend yield: 1 year: 0.1% ACE: 2.5% 3 year: 0.9% Aflac: 2.3% 5 year: 1.66% Chubb: 2.2%
Currently, all three companies’ yield is very strong compared to the U.S. Treasury yield.
The payout ratio tells investors how much of the companies’ net income is going towards paying dividends.
A good margin of safety is a payout below 65%. That way if earnings decline, they can still maintain, or even increase, their dividend.
2009 2010 2011 2012 2013 Q1 2014 Q2 2014 10%
15%
20%
25%
30%
35%
*Payout Rati o - 2009 to July 2014
ACE Aflac Chubb
Over the last five years, all three companies have a payout ratio well within the margin of safety.
Source: Company filings *Earnings per share divided by Dividends per share
Retained earnings is the income businesses take home after repurchasing shares and paying dividends.
Because it allows businesses to pay long-term debt and reinvest in the company, growing retained earnings is a great sign of financial health.
That’s why it is essential to buy businesses that have a history of increasing their dividend faster than inflation.
Otherwise, your dividends are actually losing buying power.
Since 1994, inflation has averaged 2.4%. Over the same time, our three insurers have grown their dividend at an average annual rate of:
ACE: 15%Aflac: 12%
Chubb: 11%
All three companies have well outpaced inflation.
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