Every investor needs a selection of long-term, buy-and-forget shares in their portfolio to provide a steady income, as well as capital growth without taking on too much risk. Aviva (LSE: AV) and a FTSE 100 tracker are two such investments.
On one hand, Aviva has a robust balance sheet, is well managed, operates in a long-term industry and offer attractive dividend yields. While on the other, the FTSE 100 tracker provides a healthy amount of diversification along with the potential for capital growth over the long-term.
Income play
Over the past year, Aviva has turned itself into one of the market’s best income stocks by buying peer Friends Life.
Indeed, the Friends deal transformed Aviva’s balance sheet, and synergies from the deal are expected to total £600m per annum by 2017. It is anticipated that most of this cash will be returned to shareholders.
On the balance sheet front, at the beginning of August Aviva’s capital surplus totalled £10.8bn, covering the company’s commitments by more than 170%. This figure implies that the group is well insulated from any sudden shocks. Aviva’s own analysts have stress-tested the company’s balance sheet and believe that, even after a 20% fall in equity values, the group’s economic capital coverage ratio will remain above 170%.
Still, one of Aviva’s most attractive qualities is the long-term nature of the company’s business. Selling life insurance and retirement savings products isn’t going to go out of fashion any time soon, and these products guarantee recurring cash flows for decades.
Aviva has all the traits of a great income investment. The company has a strong balance sheet, is generating excess cash and is unlikely to see sales collapse overnight. In fact, Aviva’s management is so upbeat about the company’s prospects that they hiked the group’s dividend payout by 15% when it announced first-half results at the beginning of August.
City analysts believe that this dividend growth is set to continue for the foreseeable future. Analysts have pencilled in dividend growth of 20% for next year and 15% the year after. These forecasts suggest that based on today’s prices Aviva’s shares will support a yield of 4.5% next year and 5.2% during 2017.
Slow and steady
While Aviva provides the income for your portfolio, an FTSE 100 tracker offers the diversification and capital growth all investors need.
Unless you’re Warren Buffett or Neil Woodford, buying an FTSE 100 tracker is the best way to protect and grow your wealth over time. For example, over the past two decades the FTSE 100 has risen at a rate of around 5% per annum, excluding fees, dividends and inflation. The average investor has only returned 2.5% per annum including dividends and research shows that around 80% of active fund managers also fail to beat the market.
What’s more, most tracker funds now charge less than 0.5% per annum in management fees, so it’s often cheaper to buy a tracker than the trading costs associated with active management. Two top trackers are the BlackRock 100 UK Equity Tracker and the Fidelity Index UK, which charge 0.50% and 0.06% per annum in management fees respectively. Blackrock’s tracker yields 3.04% and Fidelity’s yields 2.81%.
