Is Aviva plc A Super Income Stock?

Does Aviva plc (LON: AV) have the right credentials to be classed as a very attractive income play?

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Since cutting its dividend a year ago, shares in Aviva (LSE: AV) (NYSE: AV.US) have delivered a strong performance. They fell heavily upon news of the slashed dividend, reaching a low of just under £3, but have rebounded strongly to reach over £5 per share — a gain of over 70% in just under one year.

After the combination of a significant price rise and a dividend cut, can Aviva still be classed as a super income stock?

With a dividend yield of 2.9%, Aviva doesn’t look particularly attractive as an income play. Certainly, that’s a higher income than would be received in a typical high-street savings account and is ahead of inflation. However, it doesn’t compare favourably to the FTSE 100, which has a yield of around 3.5%.

However, Aviva’s management team looks to be pursuing a relatively conservative strategy when it comes to deciding upon the proportion of earnings that are to be paid out to shareholders. Indeed, Aviva’s payout ratio in 2014 is forecast to be just one-third of profits, meaning that two-thirds of profit are being retained within the business.

While it is, of course, necessary to retain a proportion of profits within the business each year, there seems to be considerable scope to reduce the figure and, at the same time, increase the proportion of profits paid out as a dividend. Doing so would improve on Aviva’s current yield and make it a more attractive income play.

Meanwhile, Aviva’s dividend per share payments look set to increase at a brisk pace. Dividends per share are forecast to grow at an annualised rate of 9% over the next two years, which is clearly going to be well ahead of inflation. This means that, although Aviva’s current yield is not particularly high, its yield should be around 3.5% in 2015 (assuming the current share price does not change).

Despite offering a below average yield of 2.9%, Aviva should still be classed as a super income stock. It has the scope to significantly increase its payout ratio and is forecast to increase dividends per share at an impressive pace. As a result, it remains an attractive income play.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter owns shares in Aviva.

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