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High-yield stocks pay out dividends that are significantly more than market average dividends. For example, the S&P 500’s current yield is only ~1.2%.

High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.

Donegal Group Inc. (DGICA) is part of our ‘High Dividend 50’ series, where we cover the 50 highest-yielding stocks in the Sure Analysis Research Database.

Next on our list of high-dividend stocks to review is Donegal Group.

Business Overview

Donegal Group Inc. is an insurance holding company headquartered in Marietta, Pennsylvania. Established in 1986, the company focuses on offering a range of property and casualty insurance products through its subsidiaries.

These products include commercial and personal lines of insurance, covering areas such as homeowners, automobile, and workers’ compensation.

The company operates through two segments: the investment function and the underwriting function.

The underwriting segment involves assessing and assuming the risk of insuring individuals and businesses, which is central to its business model.

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Source: Investor Presentation

Donegal Group aims to maintain a balanced mix of personal and commercial lines to mitigate risks and enhance profitability. Its investment segment focuses on managing the company’s investment portfolio to generate additional income.

This dual-segment approach allows Donegal Group to sustain steady growth and maintain financial stability.

The company announced its financial results for the first quarter of 2024, highlighting several key metrics. The company reported a 5.8% increase in net premiums earned, amounting to $227.7 million, and a 6.0% rise in net premiums written, reaching $251.4 million.

Despite a slight increase in the combined ratio from 101.2% to 102.4%, Donegal Group achieved a net income of $6.0 million, or $0.18 per diluted Class A share, compared to $5.2 million, or $0.16 per diluted Class A share, in the first quarter of 2023. The annualized return on average equity improved to 4.9%, up from 4.3%.

Donegal Group experienced a 7.3% increase in total revenues, rising to $241.1 million from $224.7 million in the same period last year. Net income showed a 14.5% growth, while non-GAAP operating income decreased by 21.6%. Investment income saw a significant boost of 16.1%, totaling $11.0 million.

However, the book value per share declined by 3.2%, standing at $14.53 as of March 31, 2024, compared to $15.01 in 2023. The per-share data indicated a 12.5% increase in net income for Class A shares and a 6.7% increase for Class B shares.

Despite challenges like weather-related losses and atypical workers’ compensation reserve development, the company anticipates better underwriting results due to recent rate increases and ongoing enhancements.

Donegal Group remains focused on achieving long-term shareholder value through sustained financial performance and profitable growth opportunities.

Growth Prospects

Donegal Group Inc. has strong growth prospects, driven by strategic initiatives focused on expanding its market presence and improving underwriting performance.

The company’s emphasis on increasing net premiums through renewal hikes and new business acquisitions demonstrates its commitment to growth.

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Source: Investor Presentation

By refining its underwriting criteria and targeting profitable commercial lines, Donegal Group aims to steadily grow its premium base while managing risk effectively.

The implementation of advanced technology and systems, coupled with a multi-year expense management initiative, is expected to yield significant cost savings and operational improvements. This positions Donegal Group to better compete in a dynamic market and adapt quickly to industry changes.

Strategic acquisitions further bolster Donegal Group’s growth, enabling it to scale quickly and enter new markets.

This inorganic growth, combined with strong financial health and a conservative investment strategy, provides a solid foundation for sustainable long-term expansion.

Competitive Advantages & Recession Performance

The company boasts several competitive advantages that bolster its market position. One of its primary strengths is its extensive network of independent insurance agencies, which provides localized service and a strong customer base across multiple states.

This distribution model ensures personalized service and deeper market penetration. Additionally, Donegal Group’s balanced mix of personal and commercial insurance lines helps diversify its risk, enhancing its resilience against sector-specific downturns.

Donegal Group effectively manages risk and ensures profitability by maintaining stringent underwriting criteria. Its disciplined investment approach focuses on preserving capital and generating steady income, which supports its overall financial health.

This careful risk management enables Donegal Group to navigate economic uncertainties better than many competitors, maintaining stability even during volatile market conditions.

The company’s ability to sustain steady revenue growth and maintain profitability during challenging times speaks to its robust business model.

Donegal Group can mitigate the impact of economic slowdowns by focusing on core strengths, such as strong underwriting standards and efficient operations.

Dividend Analysis

Donegal Group Inc.’s current annual dividend is $0.69 per share. At $12.65, it has a high yield of 5.5%.

Given Donegal Group Inc.’s outlook for 2024, EPS is expected to be $0.85. As a result, the company is expected to pay out roughly 81% of its EPS to shareholders in dividends.

The dividend appears sustainable in the meantime, and we estimate the company will grow it at a 2% rate going forward.

The 5.5% dividend yield is desirable for investors focusing primarily on income.

Final Thoughts

Donegal Group is an established regional insurance group with a diverse business book that includes commercial and personal lines.

Investors could be attracted to the stock based on its dividend growth track record and above-average dividend yield of 5.4%.

We estimate a total return potential of 9.2% per year for the next five years based on the earnings-per-share rebounding from the 2023 dip and the dividend yield, offset by a valuation headwind.

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