When it comes to building passive income from dividends, many UK investors look to household names like Tesco. With its trusted brand, dominant market position, and reliable profits, it’s easy to see why the supermarket’s shares have been a staple for income-seekers.
However, while Tesco offers defensive stability, its forecast dividend yield of 3.65% for FY 2025 isn’t particularly high. There are other well-known FTSE 100 stocks offering far more.
A high-yield share
Enter Aviva (LSE: AV), one of the UK’s leading insurance companies. With a forward dividend yield of 7% — nearly double that of Tesco — the stock presents a far more attractive income proposition.
Aviva has done a good job streamlining its business in recent years. It’s sold off multiple overseas operations to focus on its key markets in the UK, Ireland and Canada.
This has started to show through in its financial results. In the first half of the year, general insurance premiums increased by 15% year on year. Operating profit jumped 14% to £875m.
The interim dividend was bumped up 7%, with the insurer saying it intends “further regular and sustainable returns of capital“.
Meanwhile, the balance sheet is in great shape and management has ambitions to reach £2bn a year in operating profit by 2026, up from £1.7bn last year.
As far as risks go, the main one is that Aviva is exposed to economic downturns. During these, declines in asset values, lower investment returns, and increased claims can negatively impact profitability.
However, I think the potential reward of that 7% dividend yield outweighs these risks. I became a shareholder myself last year.
How many shares would I need?
According to Statista, the median annual earnings for a full-time worker in the UK in 2023 were just under £35k. If I could live off this amount, then I’d need 98,658 Aviva shares to generate the required dividends.
Based on today’s share price of 506p, those would cost me about £500,000.
Of course, most people haven’t got a spare half a million knocking about. I know I haven’t. So I’d have to build up my portfolio over time. Fortunately, this is entirely achievable.
For instance, if I invest £250 every week in a Stocks and Shares ISA, while achieving an average return of 9%, I’d reach £692,514 after 20 years. This assumes I reinvest my dividends rather than spend them and that I always manage to achieve that 9%, which isn’t guaranteed.
By this point, even a 7%-yielding portfolio of this size would be generating £48,475 in tax-free annual dividends. This extra should help with the erosion of purchasing power due to inflation over the intervening years.
Better still, I’d hope for rising dividends over time. Returning to Aviva, City analysts expect its payout to increase by around 7% each year through to 2026. That means the income yield on shares bought today could rise above 8% in 2026.
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Diversification is key
While Aviva offers a tempting yield and is in a strong financial position, it’s crucial to remember that no single dividend is a sure-fire bet. Indeed, the firm has cut its payout three times in the last two decades.
This is why I’d prefer a mix of dividend stocks rather turn just one or two. By diversifying my portfolio and consistently investing over time, I can move closer to financial independence.
