Investors have long looked at Macquarie Group Ltd (ASX: MQG) and Insurance Australia Group Ltd (ASX: IAG)("IAG") as strong dividend stocks, with the former having paid a dividend every year since the 1970's and the latter offering a high payout in terms of its habitually modest price.
That said, there's more to investing than earning a great dividend and even if you're already retired it's comforting to know that your stock can still grow its earnings. With Macquarie and IAG strong favourites of dividend-seeking investors, which is the best suited for those chasing long-term stability and growth in yields?
Over the next two to three years, Insurance Australia Group looks likely to benefit from increases in its Gross Written Premiums and hopefully an increase in the insurance cover that Australians maintain. This will be offset somewhat by the recent issue of shares to Berkshire Hathaway as part of a mutually beneficial arrangement between the two companies.
Berkshire will take 20% of IAG's Gross Written Premiums and pay 20% of claims in return. While expected to decrease earnings per share in 2016, this will help even out IAG's earnings over the long term and investors should expect an improvement in the consistency of dividend payments.
IAG is also looking for opportunities in Asia to diversify away from Australia, a venture which has some promise if successful. However, insurance in Australia remains a highly competitive and mature market, minimising the potential for IAG to deliver decent earnings growth.
Macquarie Group, on the other hand, looks to be a better bet for the long term. While banking is also a mature industry and Macquarie forecasts flat profits for 2016, the company is better placed for long-term growth.
As one of the better-capitalised Australian banks, Macquarie is already partly protected from potential changes to bank capital requirements. The bank has a track record of identifying growth opportunities and the recent focus on increasing annuity-style earnings (such as from fund management) will deliver long-term benefits to shareholders.
I think it is safe to say that over the next ten years the general trend will be for interest rates to rise higher – after all, there is nowhere to go from the bottom but up*. This will also have a positive benefit on margins and, as a global investment bank, Macquarie is very well placed to gain exposure to recovering international economies.
(*That is, unless you're a believer in negative interest rates)
So while Macquarie Bank and IAG have similar short-term outlooks, I believe over the longer term Macquarie has a number of advantages that will see it the clear winner of the two.
