I have owned Aviva (LSE: AV) shares for several years, principally for their strong dividend yield. As I only buy stocks that appear significantly undervalued to me, there is also a good chance of share price gains.
At least once a quarter, I conduct a comprehensive assessment of my stocks’ future earnings growth potential. It is this that powers any firm’s dividends and share price over time.
If the results are especially good, then I will add to these holdings, usually in increments of £5,000. Back around today’s date in 2022 (Friday, 24 June), I did just that in Aviva.
It was one of my better decisions, I have to say.
Share price and dividend gains
The opening price of the stock on that day was £3.98, so the £5,000 secured me 1,256 shares.
Today’s opening price is £6.21, which means I have made a £2.20 profit on each of those shares. Therefore, in total, they have given me a £2,801 gain – or a return of 56% on the share price alone!
Of course, I mainly bought the shares for their potential dividend gains, and these have not disappointed.
Since 24 June 2022 to today, the stock has paid a total of 100.1p a share in dividends. Consequently, I have received a total dividend gain of just over £1,257 over the period – a 25% return.
Adding together the gains from the share price and the dividends gives a total profit of £4,058. This is a return of 81% over the three years!
What’s the share price outlook?
A risk for Aviva is a sustained resurgence in the cost of living in its key markets. This may cause clients to reduce or cancel their policies with the firm.
That said, consensus analysts’ forecasts are that its earnings will increase by 17.5% a year to the end of 2027. I believe this will power its share price and dividends much higher.
Moreover, despite the recent rise in share price, there appears significant room for further appreciation.
A discounted cash flow analysis using other analysts’ figures and my own shows the stock is still 34% undervalued.
Therefore, the fair value of the shares is £9.41 against the current price of £6.21.
What about the dividends?
Aviva’s 2024 dividend was 35.7p, giving a current dividend yield of 5.7%.
However, consensus analysts’ projections are that it will increase this to 38p this year, 40.9p next year, and 44.2p in 2027.
This would generate respective yields of 6.1%, 6.6%, and 7.1%.
That said, if the stock averaged just the current 5.7% over the next 10 years, my £5,000 investment would make another £3,829 in dividends. And after 20 years on the same basis – with no projected dividend rises considered – I would make £10,592 in dividends.
This is on the proviso that the dividends are reinvested back into the stock – known as ‘dividend compounding’.
Will I buy more?
I believe that Aviva’s share price and dividends will be pushed much higher over time by strong earnings growth.
Consequently, I will be adding another £5,000 worth of shares to my holding in the firm very soon.
