Insurance company Aviva (LSE: AV) is a popular income stock among many investors. The Aviva dividend yield is a juicy 6.8%. And in its interim results released today (14 August), the FTSE 100 member announced its latest dividend increase.
So, is this a share I ought to add to my portfolio for its passive income potential?
Interim dividend increase
The rise in the interim payout per ordinary share announced today means it is set to increase by 7% compared to last year’s equivalent. It will stand at 11.9p.
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If the same increase applies at the full-year level – which is not guaranteed – that would mean an annual dividend of around 35.7p per ordinary share. That would put the prospective Aviva dividend yield at 7.3%.
That reflects the strong growth of recent years. As recently as 2021, the payout per ordinary share stood at 22.05p.
Longer term though, the dividend picture has been more mixed. The dividend for each ordinary share was cut by almost a third in 2020.
Promising outlook
Although such cuts are a risk with any dividend, that does not mean they are painless. From an income perspective, that deep 2020 cut put me off owning Aviva shares for some time.
That said, the past few years have seen the business reshape itself to focus on its core business. It has continued to demonstrate its cash generation potential. That is important in this context because it can help fund the shareholder payout.
As the company’s chief executive said in today’s announcement: “Sales are up. Operating profit is up. The dividend is up. Our plan to deliver more for customers and shareholders is working really well.”
More interesting from the dividend perspective, in my view, was a notable increase in operating funds generation and operating own capital generation. But I do also think the sales growth reflects the success of Aviva’s commercial strategy. It has been trying to grow its base of UK customers by offering them a one-stop service for a wide range of financial needs. That seems to be working well to lift revenues.
With its large customer base (almost 5m UK customers hold multiple policies with the firm), a strong brand and deep underwriting experience, I am optimistic about the outlook for Aviva – and its dividend.
I’d happily use this passive income idea
Still, as any insurer knows, the unexpected can happen. Retirement product sales fell in the first half, something I think could continue to happen due to a contracting equity release market.
Pricing is always an important factor in insurance profitability. The past several years have witnessed sharp premium increases across much of the UK insurance market. That could lay the foundations for pricing battles in future, hurting profit margins.
On balance, though, I think the interim results provide further grounds for confidence in the outlook.
Aviva has proven it is willing and able to grow its dividend significantly. I think the share looks reasonably priced and would happily buy some for my portfolio if I had spare cash to invest.
