£20,000 invested in this dividend stock could generate a passive income of…

With a dividend yield of 6.8%, Muhammad Cheema takes a look at how much passive income Aviva shares can generate over a year.

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For those looking to invest in dividend stocks, Aviva (LSE:AV) shares might be one of the best in the FTSE 100. Its dividend yield of 6.8% puts it among the highest-yielding stocks in the index. So let’s see how much annual passive income an investor could make if they put £20,000 into its shares.

So how much?

Aviva shares are currently trading at £5.07. Therefore, with £20,000, an investor could buy 3,947 of its shares. Now in the last year, the company’s paid out dividends of 34.2p per share. If we assume the dividend won’t grow or be cut in the future, then an investor could make £1,349.87 annually by buying its shares. That’s not too bad at all.

I understand that having £20,000 to hand isn’t possible for a lot of people, and they would also want to keep their portfolio diversified and balanced. But it’s still interesting to see, especially as you could start with a smaller amount and build it over time.

Moreover, investors should keep in mind that dividends aren’t guaranteed. However, I believe my figures above are actually an understatement of how much passive income could be made.

Aviva’s steadily been growing its dividend from 2021. Back then, it paid out 21p per share. Therefore, the firm’s dividend’s grown an incredible 63% over the last four years. It might not necessarily grow at this rate over the next few years, but its track record suggests dividend growth’s likely.

Sound financials

In order to assess whether a company’s in a good position to maintain and grow its pay-out, it’s important that investors assess its profitability and balance sheet. In the case of Aviva, it’s showing great evidence of achieving this.

For example, in its last quarterly results, earnings grew 59%. Furthermore, the firm has a sound balance sheet, with cash of almost £17bn and debt of only £6.3bn. Therefore, it should be in a safe position to increase its dividend pay-out over time.

There are risks to holding its shares. As a financial services firm, it’s heavily exposed to the fortunes of the UK economy. There are concerns that businesses will cut jobs and raise prices to offset measures in the recent Budget. This could hinder economic growth. In turn, this could hurt Aviva.

The risk of waiting too long

I’d also like to touch on one more point. There’s a risk of waiting too long in buying dividend stocks. Aviva shares have done well over the last month, rising 8.8%. While this is good news for current shareholders, those interested in its dividend now have to pay 8.8% more to obtain it.

While it’s no guarantee the share price will continue rising from here, I believe there are catalysts for it to do so. Even though the economy may pose some problems, the ageing UK population could benefit Aviva. This is because elderly people are more likely to make use of the kind of products the company offers, such as retirement and wealth services.

Therefore, investors may want to consider buying some of the company’s shares. This is especially the case if they like its dividend and also see the share price rising.

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.

Muhammad Cheema 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.

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