Could Aviva’s 7% dividend yield give me an income for life?

Are Aviva shares too cheap to ignore? Roland Head explains why he’s considering this income heavyweight for his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Road trip. Father and son travelling together by car

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

sdf

Aviva (LSE: AV) shares currently offer a forecast dividend yield of more than 7%. I’m wondering if this FTSE 100 insurer is an unloved bargain I could buy to lock in a big income for life.

Health warning

I’ll start by saying that it’s important to remember that dividends are never guaranteed and can always be cut. Aviva’s own record is far from perfect.

Since 2000, this FTSE 100 firm has cut its dividend four times – in 2002, 2009, 2012 and 2020. Admittedly, both 2009 and 2020 coincided with global crises. But even then, some rivals managed to preserve their payouts.

However, I think Aviva is a changed business these days. Since chief executive Amanda Blanc took charge in July 2020, she has stayed true to her promise of moving “at pace”. Today’s slimmed-down business looks stronger and healthier to me than the company she inherited.

I think there are good reasons to believe that the group’s current dividend could deliver sustainable growth for the foreseeable future.

A return to growth

One big challenge for Blanc is to find a way to return Aviva to growth. While the group’s insurance and retirement brands are very strong in the UK, they operate in pretty mature markets. Winning new customers usually means taking them from a competitor, which isn’t easy.

The good news is that Aviva seems to be cracking this problem. Sales in each of the group’s main businesses rose during the first quarter of this year:

  • Annuity and equity release sales rose by 22% to £1.3bn
  • Life insurance was up 2%, at £8.4bn
  • General insurance (e.g., motor, home) was 5% higher, at £2.1bn

Looking ahead, Aviva’s guidance is for a dividend of 31p per share in 2022 (7.1% yield), rising to 32.5p in 2023 (7.5% yield).

From 2024 onwards, the company expects to increase the dividend by a few percent each year. That should be ideal for keeping up with inflation, assuming price growth returns to more normal levels.

Aviva’s dividend guidance is backed by its projections for cash generation. On balance, I think these numbers look pretty safe at the moment.

Aviva shares: why I’d buy

I think that Aviva shares offer most of what I’m looking for as an income investor. First of all, the group’s cash generation looks strong to me. My sums suggest it should comfortably support the dividend. That’s crucial.

The second reason I might buy is that I think the shares look cheap. Aviva currently trades on eight times 2022 forecast earnings, falling to just 6.8 times 2023 earnings. The stock’s 7%+ dividend yield is another indicator of potential value, in my view.

One final reason for me to buy is that I think Aviva should benefit from rising interest rates. Broker forecasts seem to support this view. They show profits rising faster than revenue from 2023 onwards.

In my view, the potential rewards from buying Aviva shares comfortably outweigh the risk of another dividend cut. I’d be very happy to add this FTSE 100 dividend stock to my portfolio today.


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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 growth stocks absolutely smashing the FTSE 100

If you think the wider FTSE 100 is having a good year (and it is), check out the gains holders…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

FTSE 100: next stop 10,000?

As the FTSE 100 briefly hits 9,000 points, investors are already looking forward to when the next 1,000-point level might…

Read more »

Investing Articles

Is Burberry ‘back’ as a solid update drives its shares to 17-month highs?

Burberry shares have risen by more than 60% since May's forecast-beating financials. Can the FTSE 250 luxury giant keep rising?

Read more »

Two gay men are walking through a Victorian shopping arcade
Investing Articles

The Burberry share price continues to rise despite falling sales!

Our writer looks at how the Burberry share price responded to the company’s first-quarter trading update, which was released earlier…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

What a crazy day for the share price of this FTSE 250 retailer!

Our writer’s taken time to digest the latest results of the FTSE 250’s Frasers Group. And he likes what he…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

1 year on from the CrowdStrike IT outage, here’s how the S&P 500 stock has done

S&P 500 stock CrowdStrike tanked last year when the company caused a huge global IT outage. Its performance since then…

Read more »

Mixed-race female couple enjoying themselves on a walk
Growth Shares

Aiming to turn £10k into £20k? Here are 3 FTSE 250 shares for investors to consider

Our writer demonstrates how three vastly different FTSE 250 stocks could all double an investment over a decade – and…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

The unanswered billion-dollar question hanging over the Helium One share price!

With the Helium One share price stuck around 1p, our writer tries to answer the question that he reckons every…

Read more »