2 reliable dividend shares and 2 oddball ideas for SMSF investors

As you age the composition of your portfolio will likely change, because your priorities do.

When you might need the money to cover living expenses, it can be difficult and undesirable to own significant positions in stocks prone to price falls and unpredictable dividends, such as miners and smaller growth companies.

Many older investors will place a priority on stability and income, and those that do shouldn’t look past insurers like Insurance Australia Group Ltd (ASX: IAG) and Medibank Private Ltd (ASX: MPL).

Insurance Australia Group’s (“IAG”) growth outlook appears to have dimmed measurably in the past two years or so, and the company’s recent decision to lift its payout ratio to 60%-80% of cash earnings could be an implicit acknowledgement from management.

However, this also means today’s 6% dividend is likely to be at least maintained for the next few years. Over the past decade, dividends and share price movements have been less volatile than earnings at IAG.

Medibank Private is a relatively new player on the public stock exchange, but in return for less historical information, investors gain the benefits of government-regulated increases in premiums that help to ensure costs don’t outstrip earnings. Medibank also has a significant amount of market power, and this year’s higher dividend also looks likely to be sustainable for the foreseeable future.

Insurance is an attractive industry because customers must buy insurance every year, thereby giving companies a fairly defensive and semi-recurring business model – admittedly marred by higher than usual customer churn.

In 10 years or so, I wouldn’t be surprised to find if the next version of ‘insurers’ are in fact software companies with a subscription business model. With cloud platforms, high scalability, low ongoing costs, absence of claims-style risk (although also with no ‘float’, or investment portfolio) and higher levels of customer retention, many software companies have economics like insurers on steroids.

Two companies that jump to the front of my mind are XERO FPO NZX (ASX: XRO), and Altium Limited (ASX: ALU), both of which have developed systems that integrate deeply into their clients’ everyday business – making it difficult and costly to switch products, unlike with insurance.

Unfortunately Xero is unprofitable and doesn’t pay a dividend, while Altium yields just 3.8% because, like Xero, it is reinvesting heavily for growth. If both companies can successfully scale up however, much of the growing customer numbers will fall through to the bottom line as profit – and potentially dividends.

Something to think about for those who haven’t got a retirement on the cards quite yet.

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Motley Fool contributor Sean O'Neill owns shares of Xero. The Motley Fool Australia owns shares of Altium and Xero. 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 Bruce Jackson.

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