One of my main investing goals is to build a portfolio of stocks that provide a lasting passive income. By focusing on quality businesses with reliable dividends, I hope to enjoy a rising income stream many years after I stop full-time work.
If my investments perform really well, I may even be able to retire early, although there’s no guarantee of this. And one company I would consider holding in my dividend portfolio for my journey is FTSE 100 bank Lloyds.
Safe but dull?
This high street stalwart’s the UK’s largest mortgage lender. Its business model’s built around simply taking deposits and lending them to consumers and businesses.
I like Lloyds’ simplicity compared to some other UK banks. It only operates in the UK and stays clear of investment banking, where profits can be less predictable.
However, the reality is that big banks haven’t always been great investments. Although tougher regulations since 2008 have made UK banks safer than they used to be, they’re also less profitable.
On balance, I think there are also other attractive income opportunities elsewhere in the FTSE 100.
A tasty 7% dividend yield
One high-yield stock on my radar is insurance group Aviva (LSE: AV.). Shares in this £13bn group currently offer a 7% dividend yield. That could make a useful contribution to my income goals.
The company’s guidance is for the cash cost of the dividend to rise by a “mid-single digit” percentage each year. According to the latest broker forecasts, City analysts expect Aviva’s dividend to rise by at least 7% a year in 2024 through 2026.
Based on these estimates, the income yield on an investment in Aviva shares today could rise to 8.3% in 2026. That’s tempting.
What should I be worried about?
Admittedly, Aviva’s dividend history isn’t perfect. Under previous management, the company’s been forced to cut its payout three times in the last 20 years, most recently in 2019.
Like banking, insurance is also a highly regulated business with complex accounting. For a private investor like me, it may be hard to spot problems in advance. On the other hand, this business is closely followed by City experts and is a much simpler business than it was a few years ago.
Since taking charge in 2020, CEO Amanda Blanc has sold off many of Aviva’s overseas operations. This has streamlined the business so it’s focused on market-leading operations in the UK, Canada and Ireland. Profitability’s improved.
Reliable forecasts
One final attraction for me is that Blanc’s consistently met the financial targets she’s set for the business. Debt’s been reduced in line with her previous guidance. The dividend’s increasing as expected. Operating profit’s also up.
I place a lot of importance on companies delivering what they promise. In my experience, it’s one of the best ways to gauge the quality of a management team. Can they do what they say they’ll do?
Aviva shares currently trade on 10 times 2024 forecast earnings, with a 7% dividend yield. I reckon that’s a reasonable valuation. I’d be happy to add the shares to my portfolio today, if I had the cash and was looking for a new financial stock to buy.
