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Some Dividend Companies Are Thriving Even As The Dow Gets Clobbered

I know it has been a while since my last post, but I think it would get pretty depressing writing about the daily fluctuations in the market (and how it ultimately keeps going lower). Even as the Dow makes “record” lows (at least a 5 year record low), there are dividend paying companies that are paying in excess of 7% and giving excellent interest rates on their contracts.

Who are these companies that are weathering the financial storm just fine? They’re the same companies that have always weathered the storm just fine: life insurance companies.

I know what you’re thinking…AIG, blah, blah, blah…well if you’re a regular reader, you probably have read my post on why AIG represents an anomaly and why their problems were never solvency problems but liquidity problems.

In any case, the best of the breed are not stock companies like AIG, they are the old-line mutual companies.

You see, in the life insurance industry, there are two types of life insurance companies. The stock companies – which a lot of folks are familiar with. Many people like stock companies because they like to invest in stocks. They like to see those numbers tick higher which causes their investment portfolio to tick higher…

…but the other type of insurance company is closed to outside investors. It’s called a mutual company. A mutual company is owned by its policy owners.

When a normal stock company decides it wants to pay dividends, it pays them to its shareholders. These are the folks that buy stock and become part owners in the company. For policy owners, it doesn’t mean anything. They get the safety and security of an insurance contract and since shareholders are always looking for higher profits (usually stable, higher profits with financial stocks), the company is encouraged to do well for the long-term.

With a mutual company, the policy owner gets the same amount of interest credited to his life insurance policy that a policy owner of a stock company gets…but instead of the company paying dividends to outside shareholders, the insurance company pays it to the policy holders. Thus, the policy owner of a mutual life insurance company earns both the interest generated by the insurance company’s general portfolio plus the profits of the company.

…with all that in mind, you’d think that life insurance contracts would be a good investment. And, you would be wrong. Life insurance is not an investment, it’s a way to build up a cash reserve against a known claim – your death. That cash reserve – also called savings – is something that has become a foreign concept to most Americans.

Now, there’s a distinction that needs to be made here. The life insurance death benefit of the policy represents savings. The cash value of the policy represents (basically) an advance of the death benefit during your lifetime. There is an investment function embedded in the product, but unless you have direct control over the investments, you’re not investing. The insurance company is. You’re merely signing a contract for returns based on their performance.

All this mean that it’s closer to a contractually guaranteed savings than investing. But, if the policy pays dividends, as some do, then it’s a combination of a contractually guaranteed savings with an investment component. But, I digress.

By using a specially designed type of life insurance contract, you have a safe place to put your money that is extremely liquid with a guaranteed minimum rate of return that beats inflation and provides a hedge against taxes (oh, did I forget to tell you that cash values are handled on a tax-free basis?) while the non-guaranteed dividends, if they are paid to the policy, enhance the value of your savings.

What is the track record of mutual companies paying dividends to their policy owners? Since life insurance companies tend to be very conservative in how they manage risk, and mutual life insurance companies are even more conservative, their track record is excellent. Most mutual companies that pay dividends have done so since their inception (or close to it). As a mutual company, if you’ve paid dividends for 100 or 200 years every single year (yes, even during the great depression), that’s a solid track record in my book.

…and, with some of these dividend rates passing 7% this year, these companies look stronger than ever, even when the economy is not.

This entry was posted on January 11th, 2012 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Current Events, Insurance & Savings, Investing

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