Already 7%, could the Aviva dividend yield go higher?

Our writer considers Aviva’s dividend prospects. It has an inconsistent track record — but what do the chances look like from here?

| More on:

Image source: Aviva plc

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.

One of the attractions of buying shares in a proven FTSE 100 business can be the income potential from dividends. Insurer Aviva (LSE: AV) is an example. The Aviva dividend yield is currently 7%.

Could it go higher from here – and ought I to buy this share for my ISA?

Uneven dividend history

At first glance, the dividend story here looks strong. Ordinary shareholder payouts have grown annually for the past few years.  Last year, for example, the dividend increased by 7%.

But as a long-term investor, I consider more than just the most recent data when I can. Looking back over the past decade and more, we can see that the dividend has been cut more than once.

Created using TradingView

Dividends are never guaranteed at any company. The chart demonstrates what this has meant in practice. Aviva dividend growth has been healthy more than once before, only for the payout to be cut at some later point.

Reshaped company with strong prospects

Still, just because that has happened before does not necessarily mean it will again.

Over recent years, Aviva has changed the shape of its business significantly. It sold multiple ops, distributing some of the proceeds in the form of a special dividend (not represented in the chart above).

That has allowed it to focus its energy on key markets, such as the UK. It has a number of competitive advantages, including a large customer base, strong brands including Norwich Union and deep experience in underwriting.

So far, however, the results may not be obvious from the company’s profit performance. Basic earnings per share improved last year but that followed a run of declining performance.

Created using TradingView

Earnings are an accounting measure, so do not always provide the most useful info when it comes to valuing financial services firms. They can move around a lot due to changes in the value of assets a firm holds on its books, something that may bear little relation to cash flows.

When it comes to Aviva’s dividend, cash flows matter because ultimately a dividend is a means for a company to distribute surplus cash.

Here again, the company’s performance has moved around a lot.

Created using TradingView

What gives me confidence though, is that Aviva has demonstrated that it can generate significant excess cash even though the amount may move around from one year to the next.

One measure of that is what is known as ‘Solvency II operating own funds generation’. Last year that came in at £1.7bn, 12% higher than the prior year.

Future prospects look good

If Aviva can continue to generate surplus cash at a high level — which I think it likely can — then I expect the dividend to grow from here. The company says it expects to grow the cash cost of the dividend, which if the share count remains the same means the per share payout should go up. The prospective Aviva dividend yield would be higher than 7% in that case.

There are risks along the way. Poor underwriting choices could unexpectedly hurt profits, as happened at rival Direct Line last year. Its increased focus on the UK market also ties Aviva more closely to the UK economy: a recession could make policyholders more price-sensitive, hurting renewal rates.

But the income prospects attract me. If I had spare cash to invest, I would be happy to buy Aviva shares.

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.

C Ruane 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

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Growth Shares

I bought 319 Scottish Mortgage shares for my SIPP in January. Here’s how they’ve done

Scottish Mortgage shares were out of favour in January so Edward Sheldon bought more of them for his pension. Was…

Read more »

Investing Articles

Is Tesco’s share price still a bargain after rising 26% over a year?

Recent results show Tesco is still growing its leading market share, and despite its share price gains this year, it…

Read more »

Investing Articles

Is this FTSE 250 gem the next big thing in defence sector shares?

This FTSE 250 defence firm was founded by the MoD, has seen its order book and profits swell, and is…

Read more »

Investing Articles

Here’s what the National Grid share price fall could mean for passive income investors

It's long been seen as one of the FTSE 100's best stocks for durable dividends. What does the recent National…

Read more »

Female florist with Down's syndrome working in small business
Investing Articles

£6,000 in savings? Here’s how I’d try to turn that into a £500 monthly passive income

With careful planning and patience, it’s not hard to earn a passive income with UK shares. Here’s one way to…

Read more »

Investing Articles

Here’s how I’d aim for a second income of £1,000 a month, with just £10 a day

How much do we need to build a decent second income? With enough time, we could do it with a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Down 12% in a month, is this the FTSE 250’s most overlooked gem?

Our author thinks Kainos is one of the most overlooked FTSE 250 gems. Here's why he thinks the future could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to consider buying before July [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »