You should buy insurance stocks for their dividends

Companies like Insurance Australia Group Ltd (ASX:IAG) and QBE Insurance Group Ltd (ASX:QBE) are worth owning, for the right investor.

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Every investor needs to consider their aims and goals when investing. For many investors, the goal is earning a secure income for retirement, and certain companies are more likely to offer it than others.

Enter…Insurers

A reliable dividend stream is one of the reasons Aussie investors gravitate to insurers. Large general insurers like Insurance Australia Group Ltd (ASX: IAG), and QBE Insurance Group Ltd (ASX: QBE) usually carry no debt, and have billions in cash and bonds on their balance sheet. Suncorp Group Ltd (ASX: SUN) is another major insurer worth considering, although it also has banking operations which make it a more complex beast.

If it's a secure investment you're after, it's hard to look past a company like Insurance Australia Group which has $13 billion in investments on its balance sheet, and $6 billion in net assets. The company could hypothetically lose a billion dollars next year and still have zero risk of going bankrupt.

What's more, products like vehicle and home insurance are must-owns for Australian homeowners, and in some cases like Compulsory Third Party (CTP) insurance, their purchase is mandated by law.

As the largest insurers in the country, both businesses enjoy scale advantages that smaller companies lack. Thus, both Insurance Australia Group and QBE enjoy earnings that are likely to be consistent in both boom times and a downturn.

Today, they pay a 4% dividend, fully franked (IAG), and 4% franked to 50% (QBE). Whether you choose one or the other would depend on if you preferred strong international diversification (QBE), or an ANZ-centric business with promising small businesses in Asia (IAG).

Motley Fool contributor Sean O'Neill has no position in any 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 Bruce Jackson.

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