Some of the world’s best investors stick to dividend portfolios. They know that a steady stream of income is a top wealth building strategy. And finding the best deals is vital. So today, we’re going to review another one of the best dividend stocks around. Let’s take a look at American Equity Investment Life’s dividend history and safety…
Business Overview and Highlights
American Equity Investment Life (NYSE: AEL) is a $2.7 billion business. The company is based out of Iowa and it employs 554 people. Last year American Equity Investment Life pulled in $2.9 billion in sales and that breaks down to $5.3 million per employee.
The company runs within the financial sector and maintains a solid credit rating (BBB-) from the S&P. This allows American Equity Investment Life to issue cheap debt to expand operations and pay dividends.
American Equity Investment Life pays their dividend on an annual basis, so their next dividend will be announced in November.
10-Year Dividend History
The company paid investors $0.08 per share a decade ago. Over the last 10 years, the dividend has climbed to $0.28. That’s a 250% increase and you can see the annual changes below…
The compound annual growth is 13.3% over 10 years… but over the last year, the dividend climbed 7.7%. The slowdown in dividend growth isn’t a great sign. Although, American Equity Investment Life still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
American Equity Investment Life’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 0.96% and that’s below the 10-year average of 0.97%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that every $1 American Equity Investment Life earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
American Equity Investment Life’s payout ratio based on free cash flow over the last 10 years has been consistent. For the most part, the operating cash flow has steadily increased, and so has the free cash flow. Except for last year’s aberration. In 2018, the company reported a free cash flow of $40 million which was much lower than the $1.92 billion reported in 2017. Even so, American Equity Investment Life’s payout ratio has been below 70% for the past decade. And last year the company reported a payout ratio of 65%. This gives wiggle room for American Equity Investment Life’s board of directors to raise the dividend.
If you’re interested in seeing more dividend research, please comment below. You can also check out our free DRIP calculator. With it, you can uncover the power of dividend reinvestment growth.
Also, if you are planning your retirement make sure to use our retirement readiness calculator. It will help you find out if you’re on track for a wealthy retirement.
Good investing,
Robert
