Inflation has been on investors’ minds for months. For 10 consecutive months, year-on-year inflation, as measured by the consumer price index (CPI), has been above 5%. In March, the CPI was 8.5% above its level a year earlier.
Dividend stocks are an exceptional source of investment returns during periods of high inflation. According to a study by Fidelity, dividends represented 40% of the S&P500since 1930. However, during the high inflation decades of the 1940s and 1970s, dividends represented 65% and 71% of total index returns, respectively.
Since dividends bring the commodity back to investors when inflation is high, Dividend Aristocrats can be a solid stock to hold during these times. To earn a spot on this list, a company must increase its dividend payout each year for at least 25 consecutive years and be part of the S&P 500. The first requirement is a high hurdle to clear. However, this second also excludes large stocks from the list, despite their long series of payout increases.
Three stellar dividend stocks that fly under the aristocratic radar are RLI (RLI -0.64%), Former International Republic (OR I -3.23%)and United Bankshares (UBSI -1.46%).
RLI: A 46-year streak of dividend increases
RLI is a specialized insurance company, offering selected covers in the P&C insurance branches. RLI has been doing a great job of underwriting profitable policies for decades now.
One of the main indicators for assessing the quality of companies in the insurance industry is the combined ratio: the ratio of claims to expenses and their total earned premiums. It is expressed as a percentage, and a ratio below 100 is desirable, as it means the insurer collects more in premiums than it pays in claims and expenses to run the business.
RLI has made an underwriting profit for 26 consecutive years. During this period, its combined ratio averaged 88.4 and it never exceeded 100. In the insurance industry, this is a spectacular record. For reference, from 2000 to 2020, the average combined ratio for P&C insurers was 100.9.
The company’s ability to consistently underwrite policies profitably has allowed it to reward its shareholders. It has increased its dividend payout for 46 consecutive years and, at the current share price, offers a decent yield of 0.87%.
Not only that, but its payout ratio – the share of total earnings paid out as dividends – is just 53%. Thus, it should have no problem maintaining and increasing its dividend. Over the past 10 years, RLI has generated a total return (including dividends) of 421% versus 258% for the S&P 500.
Old Republic International: A 41-year streak of dividend increases
Old Republic International is another insurer, working across a range of lines that includes aviation, commercial auto, general liability and workers’ compensation. The company also carries title insurance coverage used in real estate transactions to protect lenders or buyers against claims against title to a property.
Old Republic has also done a great job of risk management. In 14 of the past 15 years, its combined ratio has been below 100, and over that time it has averaged a solid 96.
This has helped Old Republic crush the market over the past decade, delivering total returns of 365% compared to S&P 500 returns of 282%. Old Republic has raised its dividend for 41 consecutive years and, at the current shares, it returns a solid 3.91%.
United Bankshares: A 48-year streak of dividend increases
United Bankshares is a regional bank focused on the mid-Atlantic states, with a strong presence in Virginia and Washington, DC. It has achieved tremendous growth through acquisitions. Since 1982, United Bankshares has purchased 33 small regional banks. Its most recent acquisition deal, for Community Bankers Trust, closed in December and gave it additional branches in Virginia and Washington, D.C.
The efficiency ratio is a key metric when it comes to bank stocks. It measures operating expenses as a percentage of revenue – and a ratio of 50% is considered ideal. In 2021, United Bankshares posted a strong efficiency ratio of 57%. For the point of view, Bank of America and Wells Fargo implemented efficiency ratios of 67% and 69% last year, respectively.
Rising interest rates should act as a tailwind to United Bankshares’ business. Last year, its net interest income was $743 million. Management expects this to increase by 7.7% to 10.4% to between $800 million and $820 million in 2022.
The well-run bank has increased its dividends for 48 consecutive years thanks to its efficient operations and ability to identify strong acquisition opportunities over the years. And at the current share price, United Bankshares is reporting an excellent 4.14%.