S&P/ASX 200 Index (ASX: XJO) bank shares are often seen as some of the best options for dividends. But, there are other sectors that can deliver strong passive income. ASX Insurance shares can also provide a very good yield.
Sure, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have some of the bigger yields in the ASX 200 at the moment.
But, banks also come with potential issues. For example, there is a lot of competition in the sector (hurting margins) and banks have huge balance sheets. They have large loan books – it would only take a relatively small amount of loans going bad to hurt profit significantly in one year.
I'm going to talk about three ASX Insurance shares that are demonstrating good dividends and underlying earnings growth.
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Medibank Private Ltd (ASX: MPL)
Medibank is the largest private health insurer in Australia, with its Medibank and ahm brands.
The business has millions of policyholders and this number continues to grow, adding scale to the company and helping profitability. In FY23, it saw net resident policyholder growth of 10,900 (0.6%) and net non-resident policy unit growth of 78,400 (39.9%).
Medibank decided on a dividend payout ratio of 80.5% in FY23, which enabled a dividend per share of 14.6 cents. This puts the trailing grossed-up dividend yield at 5.5%.
The business added another 5,200 resident policyholders in the first four months of FY24, as well as ongoing growth in the non-resident business.
The projection on Commsec suggests Medibank could pay an annual dividend per share of 16 cents, which would be a grossed-up dividend yield of 6%.
NIB Holdings Limited (ASX: NHF)
NIB is another private health insurer – it's not quite as big as Medibank, but it is rapidly growing. The company also has exposure to other areas such as travel insurance and NDIS-related earnings. Diversification is sometimes useful for protecting and growing earnings. It also gives the company more areas to look for acquisitions.
While the dividend hasn't gone up every single year, it has been steadily trending higher since 2010. The business has provided an attractive mix between income and capital growth, as it has regularly invested for more growth.
One of the most attractive things about NIB and Medibank is that they operate in the healthcare sector, which usually has a more consistent demand for services because we all get sick sometimes (even in a recession), and the ageing tailwinds are growing in strength.
In FY23, NIB paid an annual dividend per share of 28 cents, which means the dividend translates into a trailing grossed-up dividend yield of 5%.
According to Commsec, the business could pay a grossed-up dividend yield of 5.4%.
Insurance Australia Group Ltd (ASX: IAG)
IAG is one of the biggest insurance businesses in Australia (and New Zealand), with a number of brands including NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance, WFI and Lumley Insurance.
Everyone with a car needs car insurance and I'd imagine most independent adults have some sort of home and/or contents insurance. There's a lot of consistency to the premiums, the main difficulty is the variability of claims, which can be troublesome if there's a large and expensive storm or flood.
But, the inflationary period has led to strong gross written premium (GWP) growth, and its investments in bonds are now making a lot more of a return thanks to higher interest rates. Things are looking good for the company, particularly if it can achieve ongoing higher insurance profit margins.
According to Commsec, the business is forecast to pay an annual dividend per share of 27 cents. At the franking credit rate of the last dividend paid, this would translate into a forward grossed-up dividend yield of 4.9%.
