If I invest £17,000 in Aviva shares, how much passive income could I make?

Aviva shares look very undervalued currently and could make me big passive income over time, particularly if the dividends are reinvested.

| More on:
Long-term vs short-term investing concept on a staircase

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.

Aviva (LSE: AV) shares have lost around 6% of their value since their 2 April 12-month traded high of £4.99.

This means a couple of positive things to me. First, the share price looks even more undervalued than it was before. Second, its yield has risen, as the yield moves in the opposite direction to a company’s share price.

In either event, it looks like I should check to see if it is worth my while buying more.

Undervaluation

Aviva is presently trading on the key price-to-earnings (P/E) valuation measurement at just 12.1.

This compares to its peer group’s P/E average of 19.7, so it looks very cheap on that basis.

To ascertain how cheap exactly, I did a discounted cash flow analysis using other analysts’ financial projections as well as my own.

This shows Aviva shares to be around 40% undervalued at their current price of £4.69. Therefore, a fair value for the stock would be about £7.82.

This does not guarantee it will ever reach that level, of course. But it does underline how undervalued the shares currently look.

Big passive income generator

This is important to me, as it reduces the chance of dividend gains being wiped out by sustained share price losses.

In 2023, Aviva paid a total dividend of 33.4p, which gives a yield now of 7.1%.

So, £17,000 (the average UK savings account amount) would make me £1,207 in the first year. After 10 years on the same yield, I would have another £12,070.

However, I would make a lot more if I reinvested the dividends back into the stock, known as ‘dividend compounding’.  This is the same idea as compound interest in a bank account but rather than interest being reinvested, dividends are.

If I did this, I would have made an additional £17,506 instead of £12,070. This would give me a total of £34,506, paying me £2,358 a year in dividends, or £197 every month.

After 30 years of doing this with an average 7.1% yield, I would have £142,158. This would pay me £9,716 a year in dividends or £810 a month!

Strong business outlook

A company’s dividend payout and share price are ultimately determined by earnings and profits. If the latter rise over time, then the former are likely to do so as well.

The main risk in Aviva is that inflation in its key markets picks up again, so increasing the cost of living. This could deter new customer business and prompt existing clients to cancel their policies.

This said, last year saw it record a 9% rise in operating profits to £1.47bn, from £1.35bn in 2022.

Additionally, Solvency II operating capital generation increased by 8% — to £1.46bn, from £1.35bn. This can be a powerful engine for growth and provide something of a safeguard against negative macroeconomic events.

Overall, consensus analysts’ estimates are that earnings and revenue will increase by 9.3% and 5.4% a year respectively to end-2026.

Earnings per share are expected to grow by 8.8% a year to that point. And return on equity is forecast to be 14.6% by that time.

For me, I think the price is right to add to my existing holding in Aviva. I think it will continue to pay me a high passive income, supported by strong business growth. 

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.

Simon Watkins has positions in Aviva Plc. 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

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

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

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »