The dividend cut at FTSE 100 insurer Aviva (LSE: AV) in 2020 seems a long time ago already. It was not the first time that Aviva had cut its dividend. However, since then the firm has been steadily growing its dividend per share.
In 2021, that stood at 22.1p. By last year it had grown to 35.7p. That is already impressive growth. But since then, we have seen this year’s interim dividend grow 10% compared to last year’s interim payout. Aviva also plans to keep growing its dividend per share, although of course no dividend is ever guaranteed.
What sort of wealth-building potential could this share offer an investor who takes a long-term approach?
The power of compounding
Aviva’s share price has more than doubled over the past five years. That in itself has led to significant value creation for investors who bought the share at the right time and held on until now.
That said, five years ago the share price was reeling from the pandemic and uncertainty about its dividend, with the cut announced towards the end of November 2020.
So despite the five-year rise, the Aviva share price is still well below where it stood before the financial crisis started to take hold in 2007 – and only at around half the level of its 1998 peak!
What about the dividend? At the moment, Aviva offers a yield of 5.8%. Compounding at that rate for a decade would mean a total return of around 76%, even if the share price stays flat.
So someone buying 1,000 shares in Aviva today would spend about £6,380. Compounded at 5.8% for a decade, that ought to be worth around £11,212.
But wait, there’s more (possibly)!
That sort of return would already make me happy. But that presumes that the dividend remains at today’s level.
Of course, it could fall, as Aviva has repeatedly demonstrated in the past. The brand’s leading position in the UK insurance market makes it vulnerable to price competition from rivals who want to steal some of its lunch.
But the past few years have seen steady increases. What if they keep coming? In that case, the value of the 1,000 shares could be greater than £11,212 after a decade – even without any share price growth.
A proven company with ongoing dividend potential
In fact, I see Aviva as a share that income-focused investors ought to consider.
The firm has a very strong position in the UK insurance market that gives it economies of scale – something that this year’s acquisition of rival Direct Line ought to help.
Aviva also benefits from a proven business model. It has demonstrated that thanks to its strong brand, large customer base and deep insurance expertise, it can generate sizeable spare cash.
I expect that to continue – and such cash can be used to fund dividends.
