Aviva (LSE:AV.) shares offer a 8.06% dividend yield. This means the company’s in the top 10 FTSE 100 stocks when measured by the amount of passive income they provide.
What’s more, the Aviva share price has fallen by nearly 15% in 2023. This could potentially be a good moment for me to buy cheap shares in the UK’s largest multi-line insurer.
So, how many shares would I need to earn the equivalent of £100 in dividend income per month? Let’s crunch the numbers.
Dividend investing
Investing in dividend stocks isn’t a risk-free endeavour. Aviva has a history of dividend cuts, so potential investors need be prudent to account for this possibility in their future projections.
Indeed, the insurer’s forecast dividend cover of 1.5 times earnings isn’t bad, but it’s not rock-solid either. That said, there are encouraging signs in the latest profit guidance. Aviva expects it’ll deliver 5% to 7% full-year profit growth compared to last year.
Additionally, the company has maintained its 2023 dividend guidance of around £915m in total payouts. It anticipates “low-to-mid single digit growth in the cash cost of the dividend thereafter“, which strengthens the investment case for income-seeking investors.
As I write, the Aviva share price stands at £3.84. So, to target £100 in monthly dividend income at today’s yield, I’d need 3,878 shares. This would cost a total of £14,892.
That’s a lot to invest in one company. For my own portfolio, I prefer to diversify my holdings across a number of stocks. Nonetheless, it’s a useful indication of the investment I’d need to make for a juicy £1,200 annual dividend haul.
Long-term potential
Aviva’s business model is multi-faceted, covering insurance, wealth management, and retirement. The firm’s diversification and sheer size are attractive features. They’ve helped the company streamline operations via a £750m cost-saving programme, despite inflationary pressures.
This, in turn, has boosted Aviva’s cash remittances. Strong cash generation bodes well for the future dividend outlook.
The macro demographic context looks favourable too. As populations around the world get older, many analysts expect robust long-term demand for life insurance and retirement products.
Plus, the valuation’s tempting. After a 41% slump in the Aviva share price over five years, the company trades at a price-to-earnings (P/E) ratio of just seven. That’s below the current average for FTSE 100 shares.
Risks
Despite reasons to be upbeat, Aviva faces challenges. Claims costs are rising, which has forced the company to hike its insurance premiums.
As the cost-of-living crisis continues to hit consumers’ pockets, there’s a risk they could forgo non-essential policy cover. This might hurt the company’s bottom line.
In addition, the firm’s Solvency II ratio (an important measure of capital strength) for FY22 fell from 244% to 212%. Following pension scheme and investor payouts, it dipped further to 196%.
Although Aviva’s capital position is still robust, I’m keeping a close eye on this number. I wouldn’t want to see it tumble much more.
Should I buy?
Aviva shares look attractive to me both in terms of value and dividends. If I had spare cash, I’d buy today.
However, various risks cloud the company’s trading outlook. Accordingly, I’d only buy a few shares at present to aim for a handy passive income boost.
