Extra dividend income can hide in plain sight. The popular financial websites tell you one yield, but another lurks behind the numbers.
Blue Capital Reinsurance Holdings (NYSE: BCRH) is a perfect example. Enter Blue Capital’s ticker symbol into a Yahoo Finance or Google Finance search and you’ll be told a 6.5%-or-so yield. In reality, Blue Capital’s yield is closer to 12%.
Each February, Blue Capital supplements its $0.30 per-share quarterly dividend with a special dividend. This past February, Blue Capital paid a $0.94 per-share special dividend – more than triple the stated quarterly dividend.
Unfamiliar with Blue Capital and its outsized dividend yield? I’m hardly surprised. Blue Capital is a small-cap reinsurer. Its $143-million market cap is easy to overlook. On a good day, 45,000 of its 8.8 million outstanding shares will change hands.
Insurance (including reinsurance) is a straightforward business. Most insurers earn a profit on premiums collected and investment income earned, less claims paid and business expenses.
Though a straightforward business, insurance can generate rivers of cash flow if done right. It’s no coincidence that Warren Buffett’s investing vessel, Berkshire Hathaway (NYSE: BRK-B), is technically an insurance company.
Berkshire anchors many investors’ portfolio, though not income investors’ portfolios. Berkshire has never paid a dividend under Buffett’s tutelage, and it’s unlikely it ever will.
High-Yield Dividends for Investors
Blue Capital is no Berkshire Hathaway. For one, Blue Capital’s business is reinsurance; it collects reinsurance premiums from other insurance companies. It also has a different raison d’être than Berkshire, and that’s to pay high-yield dividends to its investors.
To be sure, many insurance companies pay dividends, but few dare to pay dividends to the extent Blue Capital pays them. There’s a reason: Many insurance companies actually lose money underwriting insurance. The money is made on investment returns. These insurance companies are exposed to significant market risk, which can produce volatile annual earnings.
Blue Capital, in contrast, makes money underwriting insurance. It then backs its policies with cash and short-term Treasury securities in the equivalent amount of its maximum liability. This approach insulates Blue Capital from the market risk that virtually all other insurers are exposed to.
You can gauge an insurer’s underwriting profitability by its combined ratio. This is the sum of all expenses and claim payouts divided by premiums received. The lower the combined ratio, the higher the underwriting profits.
In the latest quarter, Blue Capital reported a combined ratio of 52.2%. Examine most insurers, and you’ll be lucky to find a combined ratio in the low-90% range. Many exceed 100%.
The dividend policy, though, is what really sets Blue Capital apart from other insurers. The company’s stated goal is to pay 90% of cash earnings as dividends. That’s good news for income investors.
Three of Blue Capital’s quarterly dividends are set at $0.30 per share. The fourth is a variable dividend based on current earnings. The last variable dividend was $1.24 per share. That produces a $2.24 annual dividend and a 12% dividend yield at Blue Capital’s market price.
Overlooked Dividend Income
Today, you can buy Blue Capital’s high-yield dividend at a value price. Its shares trade at less than eight times current EPS. They also trade at a 12% discount to book value. I chalk up the discount to the lack of institutional following. Blue Capital’s small size keeps it off most Wall Street firms’ screens. If high-yield income is your goal, you should keep Blue Capital on your screen.
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