Are IAG and Suncorp Shares a Buy for Dividend Income?

Insurance Australia Group Ltd (ASX:IAG) and Suncorp Group Ltd (ASX:SUN) both offer fully-franked dividends with a reasonable yield. Are they a buy?

Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) shares both offer fully-franked dividends with a reasonable yield. But are they a buy at today’s prices?

About IAG and Suncorp

Insurance Australia Group is Australia’s largest insurance business. Its direct heritage dates back to 1920. IAG insurance businesses ‘underwrite’ more than $11.4 billion of insurance premiums per annum and it sells insurance under many brands, such as NRMA, CGU, SGIO, SGIC, Swann Insurance and WFI (Australia); and NZI, State, AMI and Lumley Insurance (New Zealand).

Suncorp Group is a $17 billion insurance and banking company. It also has its own brand of products and operates under consumer brands like AAMI, GIO, Apia and Shannons.

Current Dividends

IAG currently offers a dividend yield of around 4% while the Suncorp dividend yield is 4.9%. While this isn’t the highest yield on offer on the ASX it beats virtually any high-interest savings account (please keep in mind shares are far riskier than term deposits).

I’d go so far to say that IAG and Suncorp may also be a better buy for dividend income than other banks like National Australia Bank Ltd (ASX: NAB), which recently had to cut its dividend. Indeed, I think the other large banks are more likely to cut dividends before Suncorp, which announced a special dividend a month ago following the sale of its Australian Life Business to TAL Dai-ichi Life Australia Pty Ltd.

I would be more apprehensive about IAG cutting dividends because of the nature of the insurance business. For example, IAG announced earlier this year that its half-year profit was down 9% due to the impact of the December 2018 hailstorm in Sydney. However, even during that set-back IAG maintained its dividend.

Valuation

The share price of both Suncorp and IAG is almost the same as it was one year ago, but IAG has enjoyed a rising share price over the last six months.

Suncorp’s valuation may be one reason to hold off buying, given its P/E ratio is significantly higher than the big four banks – a P/E of around 20x compared to 11-15x amongst the big four.

IAG has a similar P/E ratio of around 20x, but that looks cheap compared to other insurance companies like QBE Insurance Group Ltd (ASX: QBE) which trades at more than 30x.

Summary

At current prices, IAG may present better value but Suncorp pays a higher dividend yield. The solution may be to buy both or buy an ETF that invests in dividend-paying companies. As you can see in my disclosure below, I don’t own shares in either company at this time.

For other dividend-paying share ideas, check out the companies in the free report below.

3 Proven, Dividend-Paying Companies

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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.

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