Aviva (LSE: AV.) shares currently offer what might be called one of the FTSE 100‘s best dividends. The insurance firm has a diversified business model, a strong capital position, and now pays the eighth-highest yield on the entire index. The company policy of targeting “mid-single-digit dividend growth” means my dividend may keep rising year after year. The yield is forecast to rise an impressive 8% in the next year.
Let’s say I want to take advantage by targeting a £1,000 yearly passive income. How many shares must I buy? How much will it cost me? And what might happen to that yearly payout as time goes on? Let’s answer those questions.
Supercharged
The current Aviva share price is 642p (or £6.42) and the forecast dividend for the upcoming 12 months is 39p. Such tiny numbers can be tricky to work with, but luckily brokers make it very easy to select the number of shares you want these days.
To reach £1,000 in dividends, the number of Aviva shares required is 2,564. An outlay of £15,487 is required to purchase them at the current price. This is based on current forecasts, which can change. I must also remember that dividends are never guaranteed.
My dividend yield on this calculation is 6.07%. That’s another way of saying I get that much of a percentage return each year.
However, the real magic in dividend investing is finding a dividend that grows over time so my yield gets higher as time goes on. If I don’t need the cash straight away, then I can reinvest the dividends too in order to really supercharge my passive income.
A buy?
The company has recently completed the acquisition of Direct Line. This could be a positive development as the integration may lead to better efficiencies and higher earnings in the long run.
There is also an ‘execution risk’ to consider with such a large deal. The purchase cost around £4bn, a pretty big figure compared to Aviva’s £20bn market cap. If the new operations are poorly integrated into the existing business then this may have a large impact on future performance.
Another reason the stock looks attractive is the valuation. The forward price-to-earnings ratio is around 11 at the moment. That’s some distance below the sector average of 16 and also the FTSE 100 average of 18. With the talk of a stock market crash getting ever more fierce, stocks with cheaper valuations can provide safety in a portfolio.
I have a position in Aviva shares myself. It’s not earning me £1,000 a year in dividends just yet, but I’d say it’s one of the better dividend stocks that I hold. I’d call it one to consider for anyone seeking a reliable income stock.
