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Is it a good idea to buy shares of Suncorp and IAG for dividends?

Tristan Harrison

Insurance businesses have a fairly strong reputation as being dividend shares.

When we look at the current trailing dividend yields for Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG) we can see that they do have good yields.

Suncorp has a fully-franked dividend yield of 5.3%.

IAG has a partially-franked dividend yield of 4%.

Insurers earn money in two ways. They generate profit from their insurance policies that they write and they generate investment returns from the float. Insurance float is money that insurers invest until an insurance claim comes in.

Warren Buffett’s Berkshire Hathaway has benefited enormously from float. He sees it as free money to invest. If we were to borrow money from the bank to invest in shares it would cost us interest. With insurance float, policyholders are paying the insurance company to invest it. On paper, insurers can be good investments.

But these days it’s getting harder for insurers to make money. There is a higher frequency of damaging storms on the east coast of Australia which costs many millions of dollars every time a storm rolls through Brisbane or Sydney.

Comparison sites and the low cost of capital these days mean insurers are generally earning less than they used to. The environment after the royal commission may also be more challenging. 

There are also question marks about what automated cars will mean for the auto insurance sector. I don’t think it will result in premiums going up, that’s for sure! Lower premiums should mean lower profit. 

Both Suncorp and IAG have proven that in any given year they are willing to pay a high dividend yield for the share price. But I don’t think there is much visibility for future earnings (growth) of both companies over the long-term. They both haven’t been growing the dividend consistently either, which is one of the main things I look for in a dividend share. 

Foolish takeaway

When it’s too hard to value a business I think it’s easier just to avoid investing in it. There are plenty of other investments to consider for our portfolios, we don’t have to take on the hard ones.

The post Is it a good idea to buy shares of Suncorp and IAG for dividends? appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019