One of the very best investment strategies over the last four years has been loading up on companies that pay fat, fully franked dividends. This has come about because Australian interest rates have fallen to an all-time low, putting pressure on retirees and near-retirees that rely on interest income to fund their lifestyles.
For many of these Australians, moving term deposit or bond investments into more risky shares has paid off in improved income and significant capital gains, but how will they fare over the next , 12, 24 or 36 months?
Economists are betting on the benchmark interest rate being lower in 12 months than now, so investors who haven't already switched to shares may soon be forced to do so.
Insurance Stocks
Insurance companies on the ASX have traditionally been great at paying out large dividends and Warren Buffett loves insurance companies, their reliable income streams and low investment requirements allows them to pay generous dividends to shareholders.
When it comes to the major ASX-listed insurance brokers, you have three choices: Insurance Australia Group Ltd (ASX: IAG), QBE Insurance Group Ltd (ASX: QBE), and Suncorp Group Ltd (ASX: SUN). The problem is that Suncorp has a bank division that distorts the comparison so it won't be assessed here.
In the most recent reporting season Insurance Australia Group's first half net profit fell to $579 million from $642 million a year earlier, while QBE reported a full-year net profit of $US742 million, up from a loss of $US254 million a year earlier.
At the current price of $5.85, IAG is expected to deliver a full-year yield of 6.2% fully franked, or 8.8% grossed up. At $13.38, QBE is yielding just 3.2% or 4.6% grossed up, however this doesn't tell the whole story!
Outlook
The three to four year outlook is pivotal when choosing between the two companies. QBE has had a terrible three years with almost every segment underperforming, while IAG has been firing on all cylinders and aided by a lack of natural disasters. As such, the upside potential of QBE is much better than that of IAG.
Analysts believe that QBE's dividend payout could increase by 40% over the next two years, while IAG's may actually go backwards if it is adversely affected by local competition or natural disasters!
