DIvidend shares can be a great source of income and a great way to grow your wealth over time. According to FactSet data, from 1991 to 2015, dividend paying stocks outperformed non-dividend paying stocks by 9.7% to 4.2%.

One way to tell if a stock has the highest dividend is its history of increasing payouts. A company must have steady earnings growth, consistent cash flow and strong capital management to increase its dividends steadily over time.

A stock that ticks these boxes is Cincinnati Financial (NASDAQ: CINF). The insurer has an impressive history of dividend payouts – it has increased its payouts to shareholders for 62 consecutive years. Not only does that put him in the exclusive Dividend Kings club, but only eight other companies have a longer streak. Here’s what makes this dividend-paying stock more difficult than others.

Why Warren Buffett loves the insurance industry

Insurance companies can be great dividend stocks because of their ability to generate cash flow, and that’s one of the reasons Warren Buffett loves the industry. Insurance companies represent more than 25% of Berkshire Hathawayincome.

Insurance companies make money primarily by writing policies. They charge premiums based on the risk they believe they are assuming and the likelihood of a claim. It’s a great business for cash flow because insurance is always in demand – voluntarily in some cases, and required by law in others.

Cincinnati Financial writes property and casualty insurance policies, primarily for commercial businesses. It also underwrites auto and home insurance policies for individuals, which is a smaller part of its business.

Image source: Getty Images.

Why Cincinnati Financial is tougher than others

What makes Cincinnati Financial tougher than the rest is its ability to consistently generate cash flow through profitable insurance policies. From 2016 to 2020, the company increased the growth of its written premiums of its P&C insurance at a constant compound annual growth rate of 6.1% compared to the industry average of 4.6%.

Growth in underwriting cash flow is critical to maintaining and growing a dividend. But insurers also need to make sure that the policies they write are generating a good profit. Rest assured, Cincinnati Financial has been writing profitable policies for years, as evidenced by its combined ratio.

The combined ratio measures how well an insurance company manages risk. The ratio is determined using claims paid plus operating expenses divided by premiums written. A ratio below 100% means profitability, and the lower the better. Cincinnati Financial has done an excellent job of managing this risk. Over the past 10 years, the company has posted an average combined ratio of 94.6%.

Previous years were a little more fragile; from 2008 to 2011, the company averaged a combined ratio of 104.1% due to the weak economy and difficult environment for insurers. However, it was only an echo on the radar. The insurer hired its current CEO, Steve Johnston, in May 2011 to right the ship. Under Johnston’s leadership, the insurer improved its predictive analytics models to better assess risk and cost-effectively price policies. What is impressive to me is that the company has maintained its dividend increases during this difficult period, which is a testament to its exceptional capital management.

A chart shows Cincinnati Financial's dividend payout and dividend yield over 35 years.

CINF Dividend Data by YCharts

He has that work in his favor

Management has found a way to bounce back from difficult times over a decade ago. Cincinnati Financial is taking steps to ensure it maintains profitability in the competitive insurance industry. In recent years, the insurer has used artificial intelligence (AI) to leverage its expertise to underwrite better insurance policies while improving the claims process.

These investments have paid off. The company credits these models with reducing its share of property and accident losses relative to the industry in recent years. He also credits these models with helping the company avoid high-risk areas like the coast where Hurricane Ida made landfall in August 2021. This AI model was also used to quickly manage complaints. For example, after Hurricane Ida, he used AI-assisted loss detection. Using high-resolution aerial imagery, he was able to examine home damage, quickly identify customers with exterior damage, and pay for losses, before many customers returned home.

Cincinnati Financial could also be strong to weather inflationary periods. This is because insurance companies have the power to set prices and can adjust the premiums charged in response to rising claims costs. The insurer could also benefit from the rise in interest rates, its investments with fixed maturities increasing in fair value by 5% for a variation of 1% in short and long-term rates.

Cincinnati Financials’ stellar history of dividend payouts and tailwinds for insurers makes this Dividend King you don’t want to miss.

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Courtney Carlsen has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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