Should you buy Insurance Australia Group Ltd (ASX: IAG) shares for the dividends?
There are a few things to consider first:
- How much is the dividend?
Insurance Australia Group ("IAG") paid 33 cents in dividends last year, which means that at the current share price of $7.27, it has a 4.5% dividend yield, fully franked.
- How likely is the dividend to be maintained?
IAG is one of the largest insurers in Australia with significant market share. Generally speaking, on average and over time, the dividend is likely to be maintained. However, due to the vagaries of the insurance business model, and the unpredictability of natural disasters, IAG can't be relied upon to deliver a certain amount of income in any given year. Dividends have historically fluctuated significantly depending on the amount of natural disaster activity.
- How likely is the dividend to grow?
As a major insurer already, IAG is unlikely to grow its market share further, and its Asian businesses are small and unlikely to become meaningful contributors for some time. However, insurance prices have been weak for several years now, which could lead to stronger profits and dividends if the market picks up. This is a cyclical process. Additionally, IAG has significant investments in bonds and cash accounts. It will be a big beneficiary of higher interest rates.
Over time it is likely that IAG could see higher profits and dividends (bearing in mind my caveat about natural disasters). However, these are due to largely external events and it is difficult to see IAG's business itself actually growing significantly.
Is IAG a good dividend share?
One of the best, and historically it has been very popular for just this reason. However, as an insurer, it can't be absolutely relied upon for consistent income. IAG would do well as part of a diversified portfolio.
