This is the second installment in a multi-part series that looks at different sectors that have traditionally been very friendly to dividend investors. Each of these sectors has attributes that make the companies in them potentially desirable to long-term buy-and-hold dividend growth investors. Understanding these attributes will hopefully help us to select the very best companies for our income portfolios. Last week we looked at Consumer Goods Sector. This week we are looking at Financial Services…
Financial Services Attributes
The Financial Services Sector includes insurance companies, banks, brokerages, mutual fund companies, and other similar companies. Before the 2008-09 financial meltdown, financial services stocks were the cornerstone on many dividend income portfolios. They offered relatively high yields and good dividend growth rates, for the perceived small risk of the stock. Unfortunately, things are not always as they seem. Under the surface banks were making questionable loans , while investment firms were creating and peddling exotic financial instruments. In effect, their CEO’s were building a house of cards in a hurricane – they were destined to fail, and they did.
This should be a warning when investing in the Financial Services Sector – not a stop sign. Many of these companies are in very lucrative positions. With interest rates as low as they are, banks are enjoying decent spreads, not to mention all the new fees they are dreaming-up to charge their customers. With the advent of electronic banking, we have so much tied to our accounts. The pain threshold of changing banks is high, and they know it.
Have you ever filed an insurance claim and were satisfied with the outcome? I have not spoke with many people that have. Recently, a hail storm hit my neighborhood causing damage to several roofs, including mine. My insurance company (a name that everyone would know if I mentioned it) paid less than 10% of the damage I incurred – then raised my rates. They will recoup their payment to me in about 20 months. What a business model! You can complain about it, or invest in the industry and profit from it. I’ve chosen the latter.
Financial Services Companies
Below are several leading Consumer Goods companies that I follow. The companies selected have a dividend yield in excess of 2.25% and have raised their dividends for at least 10 years.
People’s United Financial Inc. (PBCT) | Yield: 5.9% | Growth: 11.3% | Years: 13
People’s United Financial Inc. provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.
Old Republic International (ORI) | Yield: 5.7% | Growth: 15.0% | Years: 29
Old Republic Intl writes property and liability, mortgage guaranty, title and life, and disability insurance.
Mercury General Corp. (MCY) | Yield: 5.5% | Growth: 1.1% | Years: 23
Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Hudson City Bancorp Inc. (HCBK) | Yield: 5.4% | Growth: 1.7% | Years: 10
Hudson City Bancorp Inc. operates over 100 branches in the New York metropolitan area. It caters to high median household income counties and focuses on jumbo mortgage loan funding, largely through time deposits.
Cincinnati Financial Corp. (CINF) | Yield: 4.8% | Growth: 1.0% | Years: 50
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
Arrow Financial Corp. (AROW) | Yield: 4.2% | Growth: 2.2% | Years: 17
Arrow Financial owns Glens Falls National Bank & Trust Company and Saratoga National Bank & Trust Company, which offer commercial and consumer banking and financial products in U.S.
Community Trust Bank Corp. (CTBI) | Yield: 4.2% | Growth: 0.8% | Years: 30
Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.
Harleysville Group Inc. (HGIC) | Yield: 3.8% | Growth: 8.0% | Years: 24
Harleysville Group Inc. underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States.
First Financial Corp. (THFF) | Yield: 2.9% | Growth: 1.1% | Years: 22
First Financial Corporation provides various financial services from 48 branch offices in west-central Indiana and east-central Illinois (Dec. 31, 2008).
Chubb Corporation (CB) | Yield: 2.5% | Growth: 5.7% | Years: 46
Chubb Corporation is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.
The Financial Services sector is the second largest sector in my database of dividend stocks. Of the 198 stocks that I track, it currently is represented by 33 stocks (17%). This is a sector many dividend growth investors are hesitant to own. The perceived higher risk brings higher yields and with potential growth to the income investor. Even after the melt-down, many income and value portfolios continue to be over-weighted in Financial Services, including Warren Buffett’s Berkshire Hathaway (BRK.A) at 41%. As for my portfolio, I will continue to enjoy what the Financial Services Sector brings to the table, but I will limit my exposure to no more than 10%.
Full Disclosure: Long CINF, HGIC. See a list of all my income holdings here.