Dividend Investors: Which Insurance Company Is the Best Fit for Your Portfolio?

Great-West Lifeco Inc. (TSX:GWO) pays a yield of 4.15%, while Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) raised its dividend by 10% this year. Which insurance company is the best fit for your dividend portfolio?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Not unlike their banking counterparts, Canadian life insurance companies are widely viewed as being relatively safe to buy and hold for the long term. The life insurance industry is highly regulated in Canada which, historically, has meant less competition, greater pricing power, and greater sustained economic profits for the insurers.

Let’s take a closer look at the Big Three Canadian life insurers: Manulife Financial Corp. (TSX:MFC)(NYSE:MFC), Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF), and Great-West Lifeco Inc. (TSX:GWO) to see which is the right fit for your dividend-growth or income portfolio.

When evaluating a prospective dividend investment, the first thing most investors will do is review a company’s current dividend yield. The current dividend yield tells us which company offers the best income stream if we were to assume a scenario of no growth for these companies going forward.

When comparing the current yields for the three companies, Great-West registers the highest current yield at 4.15% followed by Sun Life at 3.79% with Manulife trailing behind at 3.32%.

The dividend yield tells how much we as investors will receive this year, but it fails to account for each company’s ability to raise their respective dividends for years to come and what the dividend will look like in five or even 10 years.

To incorporate this view for future dividend growth, we can estimate the potential for a company’s pace of sustainable dividend increases by combining our outlook for that company’s return on equity (ROE) with its retention ratio, or the percentage of earnings which are retained by the company for reinvestment purposes rather than being paid out as dividends.

Among the three, Great-West generates the highest ROE at 13.41%. Combine this with a retention ratio of 47%, and we can safely expect Great-West to grow its dividend by 6.27% annually so long as it can maintain this level of performance.

Sun Life registers a slightly lower ROE of 12.79%; however, it pays out only 41% of earnings in the form of dividends. By retaining the other 59%, the company should be expected to sustainably increase its payout by 7.4% going forward.

Manulife only generated ROE of 8.01% in 2016 and retained just 51% of those earnings, giving the company a sustainable growth rate of just 4.11%.

Interestingly, looking at how much these three companies actually raised their dividends for 2017 tells us a slightly different story. Manulife increased its payout by 10.8% this year, while Sun Life and Great-West were more in line with their sustainable growth rates with dividend increases of 7.5% and 6.1%, respectively.

Which should you buy?

Manulife appears to be the obvious laggard of the three, offering the lowest yield and lowest sustainable growth rate today. While the company raised its payout by the most of any of the three this year, its performance will have to improve materially if it expects to maintain the current pace of hikes going forward.

Sun Life and Great-West, however, appear to offer solid dividend investments for a conservative dividend-growth portfolio.

With both offering yields under 4.25%, it may be difficult to justify these investments for inclusion in an income portfolio, but with growth rates closing in each company’s respective cost of capital, these two insurance companies would be a good fit for a long-term buy-and-hold dividend investor.

Should you invest $1,000 in Canadian National Railway right now?

Before you buy stock in Canadian National Railway, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Canadian National Railway wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jason Phillips has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

ways to boost income
Dividend Stocks

How I’d Invest $5,000 in Canadian Energy Stocks to Reach Toward Millionaire Status

These energy stocks can provide investors in Canada with some of the top growth opportunities and dividends to boot!

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

How I’d Invest $8,200 in Canadian Monthly Dividend Stocks to Pay for My Retirement Lifestyle

If you have some cash on hand, then these monthly dividend stocks can provide you with cash for life.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Here’s Exactly How $20,000 in a TFSA Could Grow to $300,000

Can you grow $20,000 into $300,000 by holding the iShares S&P/TSX Index Fund (TSX:XIC) in a TFSA?

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use $15,000 in a High-Yield Dividend ETF for Steady Passive Income

This ETF has it all, a strong portfolio of dividend payers, along with a high yield for investors.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

A 9.9 Percent Dividend Stock Paying Cash Every Month

If you are looking to park your money for the short term and earn from it, this 9.9% dividend stock…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Have Room in Your TFSA? 1 Canadian Dividend Champion for April Investors

If you've got extra cash in your TFSA, the latest dip in markets may provide you with a golden opportunity…

Read more »

engineer at wind farm
Dividend Stocks

Beginner Investors: How I’d Allocate $5,000 in 2 Safe Dividend Stocks

There are plenty of great dividend stocks on the market, but these two are buy-and-forget candidates that will boost your…

Read more »

grow money, wealth build
Dividend Stocks

Invest $25,000 in These 3 Dividend Stocks for $1,600 in Annual Income

These three Canadian dividend stocks could deliver a reliable passive income of over $1,600 annually.

Read more »