The last 12 months has seen the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) rally 17%, which is the right environment for financial service businesses to perform well. As the chart below shows, three businesses which have all outperformed the index are AMP (ASX: AMP), Challenger (ASX: CGF) and SFG Australia (ASX: SFW).
Source: Google Finance
While falls in the share market generally create an environment less favourable to financial services firms, Challenger in particular does have the advantage that its main product is annuities, which potentially become more appealing in times of market volatility.
In any case, the long-term outlook for financial services is a positive one, particularly given the legislated increase to superannuation contributions. While this is a longer-term theme, investors can also receive attractive dividend yields now. Currently AMP and Challenger are both paying very close to 5%, while SFG's dividend yield is 4% — not bad if it also comes with earnings growth.
One way for companies to grow earnings will be through consolidation within the industry. SFG is obviously keen to partake in this consolidation and rationalisation, however showing good restraint and financial discipline, the management of SFG recently walked away from merger discussions with the underperforming accounting firm WHK Group (ASX: WHG) where synergies must have started to look less appealing than first thought.
Foolish takeaway
Identifying businesses that are well positioned in growing industries and that pay dividends can provide investors with market beating returns.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
