Aviva (LSE:AV.) shares look very attractive for investors seeking income right now.
The forecast dividend yield is 8.3% for this year and rises to a mighty 9% in 2024. The potential for that level of inflation-beating income has certainty caught my attention.
But how much would I need to invest to secure £1,000 a year in passive income? Let’s take a look.
A stock in the bargain basement
Aviva shares are incredibly cheap, trading at just 7.68 times earnings. That’s due to the fact that the share price hasn’t performed spectacularly well in recent years. Indeed, it’s lower now than it was 10 years ago.
Over a five-year period, the stock is down 38% (excluding dividends). This has resulted in that eye-catching 9% dividend yield for next year. That’s based on analysts’ expectations that the firm will pay out 36.6p per share.
In terms of passive income, that would mean I’d need 2,750 shares to generate £1,000 in annual dividends. Those would cost me £11,000 at today’s share price of 400p.
Company turnaround
Now, it’s always a dangerous game making income assumptions from dividend stocks. That’s because payments aren’t always met and analyst forecasts can be wrong.
In the case of Aviva, that’s specifically true, as the firm has a history of lowering its annual shareholder payouts. For example, the dividend per share today is lower than it was in 2018. So Aviva is certainly no Dividend Aristocrat.
However, it’s important to remember the context here. Since 2020, the insurer has been through a period of restructuring under the leadership of chief executive Amanda Blanc. This has resulted in segments being sold or significantly restructured, with the company drilling down on its most profitable segments.
Along the way, the balance sheet has been fortified. As a result, the company is far leaner and I think the dividend appears to be much more sustainable moving forward.
Encouraging results
In the three months to 31 March, the company made an “encouraging” start to the year. Its general insurance gross written premiums rose by 11% year on year to £2.4bn.
Meanwhile, retirement sales came in at £1.5bn, a 17% increase. Workplace net flows were up 25% to £1.8bn.
Management said: “We have market leading positions in high growth areas. We are financially strong with an attractive and growing dividend, and we are confident in the prospects for Aviva”.
Looking forward, the company remains on track to meet its cost reduction target of £750m by 2024.
Ageing population
The government projects that nearly one in seven people will be aged over 75 by 2040. One consequence of this will be that annuities and other pension products should see increasing demand. So I’m bullish on the UK’s life insurance sector as a whole.
The only thing giving me pause for thought here is that I’ve already got quite a large holding in fellow UK insurer Legal & General Group. Plus, I’ve recently been digging into Prudential, another insurer, with an eye towards starting a position.
Nevertheless, I’d still add this stock to my portfolio today if I had the money to do so. Opportunities to potentially lock in that level of passive income from a quality company don’t pop up too often.
