The Aviva (LSE:AV.) share price has sunk 10% since the beginning of 2023. The good news for dividend investors is that this descent has pumped up the yields on current dividend forecasts.
City analysts expect the FTSE 100 firm to raise annual payouts consistently over the next few years. So a dividend yield that already smashes the UK blue-chip average becomes ever more impressive.
For 2023, Aviva shares carry an 8.3% dividend yield. This is far above the 3.8% average for FTSE stocks.
And yields for 2024 and 2025 march to 9% and 9.1% respectively. But how realistic are these forecasts? So should I buy the life insurance giant for my portfolio today?
Dividend growth
Demand for financial services tends to fall when consumers feel the pinch. So as the UK economy flatlines, Aviva faces the risk of falling revenues over the short-to-medium term.
Yet despite this risk, City analysts expect the firm to steadily grow earnings (and dividends) in the next few years.
Last year’s full-year payout of 31p per share is tipped to increase to 33.5p in 2023. Additional hikes, to 36.4p next year and 36.6p in 2025, are also expected.
Cash machine
Reassuringly for investors, Aviva is an impressive cash generator that could help it meet these forecasts. Indeed, its ability to create mountains of cash pushed its Solvency II capital ratio to 212% as of the end of 2022.
In fact, the firm’s rock-solid balance sheet allowed it to complete a £300m share buyback programme earlier this month. Its commitment to returning excess cash to investors means more repurchasing activity could be coming down the line.
That said, it’s important to recognise that dividend cover over the next few years is far from ideal. Predicted dividends are covered between 1.6 times and 1.9 times by estimated earnings during the next three years.
These figures aren’t terrible by any means. But they are below the widely-regarded safety benchmark of 2 times and above.
Encouragingly, Aviva’s low dividend cover hasn’t prevented it from paying market-smashing dividends in recent years. But past performance isn’t always a reliable indicator of the future. And if earnings here fall off a cliff, actual dividends could well disappoint.
So what should I do next?
On balance, I think Aviva is a top FTSE 100 stock to buy right now. As well as those huge dividend yields, its shares trade on a forward price-to-earnings (P/E) ratio of just 7.5 times.
Like all investors I dont have unlimited reserves of cash I can use to invest. But the company’s terrific all-round value means I’ll be looking to buy it as soon as I have extra cash to invest.
I’m expecting Aviva shares to deliver exceptional returns over the long term too. As older populations in its core markets rapidly grow, the firm can expect demand for its protection and investment products to steadily increase.
