The insurance sector is one which has been hit hard of late, due to a confluence of factors. The COVID-19 pandemic has resulted in a global rush to monetary stimulus which has resulted in a global reduction in interest rates.
This reduction in interest rates has forced insurers like Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) to adjust how it matches its long-term liabilities with its long-term assets. As yields decline, it becomes more difficult for insurers to pay out future claims from guaranteed returns from government bonds. Insurers may, therefore, be in a position where raising premiums or reaching for higher-yielding securities is necessary to meet future obligations.
Manulife’s dividend yield, which has fluctuated in the 5%-6% range of late, has also depended upon growing cash flow, mainly dependent on investment returns from the float it receives in the form of premiums from its customers. While I do not see any immediate material concern for this company’s dividend, I do think investors are likely to pay more attention to the balance sheet and cash-flow health of insurers like Manulife moving forward.
With markets stabilizing to a fair degree of late, Manulife could prove to be a great long-term dividend pick if this recovery continues and we do not see a major collapse in financial markets. If interest rates do increase in the next few years, now could prove to be a great time to pick up shares of a company like Manulife, whose dividend is substantial enough to pay investors to wait for the recovery.
Invest wisely, my friends.
