FTSE insurance and investment giant Aviva (LSE: AV) has been a core holding in my passive income portfolio for years. This group of shares pays regular income from dividends without too much effort on my part (hence the ‘passive’ label).
A risk to the firm is the high level of competition in its sector that may squeeze its margins. Another is a further sustained surge in the cost of living that could prompt customers to close accounts.
Nevertheless, analysts forecast that its earnings will grow by a very robust 29% a year over the medium term. And it is ultimately growth here that pushes any firm’s dividends (and share price) higher over time.
Sustained dividend rises
Aviva lifted its annual payouts in each of the past five years, from 22.05p in 2021 to 39.3p in 2025. The generated respective average annual dividend yields of 3.1%, 7%, 7.7%, 7.6%, and 5.7%.
The lower yields in some years, despite the rising dividends, highlight that these returns can change over time.
Even so, analysts forecast dividend payouts to increase to 41.7p this year, 44.6p next year, and 47.6p in 2028. These would generate respective dividend yields of 6.8%, 7.3%, and 7.7%.
By comparison, the current FTSE 100 average is only 3.1%.
How much dividend income can be made?
Thirty years is widely seen as the standard investment cycle for long-term investors. It starts with first investments around age 20 and ends with early retirement options at about 50.
After 10 years on the forecast 7.7% yield, investors would make £23,089 from an initial £20,000 holding. This assumes that the dividends are reinvested back into the stock to harness the power of dividend compounding.
After 30 years on the same basis, the dividends would increase to £180,007. Including the original £20,000, the holding’s total value would be £200,007 by then.
And that would generate an annual income of £15,401.
Share price gains as well?
As well as generating high yields, the dividend stocks I buy always look underpriced to their ‘fair value’. This number represents the underlying worth of the stock, while price is just whatever the market will pay at any point.
The crucial point here is that asset prices tend to converge to their fair value over time. So understanding and quantifying the difference between price and value is crucial for long-term investors’ profits.
In Aviva’s case, a discounted cash flow analysis — including an assumed 7.2% discount rate — shows the shares are 52% undervalued at their current £6.15 price.
Some analysts’ DCF modelling is more bearish than mine. However, based on my DCF, the fair value for the stock is £12.81 — more than double today’s price.
So that gap suggests a potentially superb buying opportunity to consider today if those DCF assumptions prove accurate.
My investment view
I have owned the shares for several years now, adding every now and again to my holding on price dips.
Given the stock’s 12% decline from its 6 January one-year high, its excellent earnings growth forecasts and its rising dividend yield projection, I will buy more soon.
I also have my eye on other similar shares with even higher dividend yield forecasts in the coming years.
