An A-Rated Dividend Machine

Being a baseball fan, when I think of Cincinnati, what typically comes to mind is the Big Red Machine – those great Cincinnati Reds teams of the 1970s led by Johnny Bench, Joe Morgan and Pete Rose.

But considering the Reds’ lack of success lately and the fact that I’m a die-hard dividend investor, my thoughts should change. When it comes to Cincinnati, instead of thinking about the Big Red Machine, I should think about the Big Dividend Machine – Cincinnati Financial Corp. (Nasdaq: CINF).

The Cincinnati-based insurer has raised its dividend every year for 54 years. The last time Cincinnati Financial did not raise the dividend, Johnny Bench was 12 years old.

It currently pays a 3.5% dividend yield. Over the past 10 years, the dividend has grown an average of 5.7% per year.

Can the 54-year streak continue?

Cincinnati Financial writes commercial, auto, home, life, umbrella and disability insurance. It also offers annuities. Last year, the company collected $4.2 billion in premiums with two-thirds of it coming from businesses and one-third from individuals.

Last year, it generated $864 million in free cash flow. During that time, it paid out $278 million in dividends for a payout ratio of just 32%.

(The payout ratio is the percentage of cash flow or earnings that is paid out in dividends. Typically, I like to see a company pay 75% or less of its cash flow to shareholders. That way, if the company has a bad year or two and cash flow declines, the dividend won’t be in jeopardy.)

Cincinnati Financial’s 32% payout ratio is low. It could be a little higher and pay a bigger dividend, but considering the company is in the insurance business, it takes only one or two natural disasters to put a big dent in cash flow.

And considering that management has been raising the dividend every year for more than five decades, I’m going to give it the benefit of the doubt.