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What Dividend Hunters Need To Know About Aviva plc

Today I am looking at whether Aviva (LSE: AV) (NYSE: AV.US ) is an appealing pick for those seeking chunky dividend income.

Explosive dividend growth expected

An environment of consistent earnings pressure in recent years has put Aviva’s dividend policy on the backfoot, a situation from which it is yet to recover from. The insurance giant was forced to cut the total payout to 19p per share in 2012 from 25p in the previous year, while the decision to rebase the payout back in spring 2013 pushed last year’s reward still lower, to 15p.

However, a combination of surging revenues in its key markets and significant restructuring is expected to thrust its progressive avivadividend policy firmly back on track from this year.

City analysts are predicting a 114% improvement in earnings to underpin a 10% rise in the total dividend, to 16.6p. And further out, current forecasts point to additional solid earnings growth in coming years, with a 9% improvement in 2015 helping push the full-year payout 15% higher to 19p.

Although of course a welcome step in the right direction, income hunters should be aware that yields during the medium term are hardly inspiring. Figures of 3.2% and 3.6% for 2014 and 2015 respectively are more or less around the wider FTSE 100 average.

But for long term investors, projected dividend hikes further out are set to electrify yields in coming years — readings of 4.1% and 4.8% are pencilled in for 2016 and 2017, underpinned by the impact of the company’s restructuring drive on future earnings.

Group in great shape for income expansion

Indeed, a backdrop of steadily-recovering earnings creates dividend coverage comfortably above the safety benchmark of 2 times, boosting investors’ peace of mind over the level of future payouts. Aviva sports a reading of 2.9 times forward earnings for 2014, based on current projections, and which remains elevated at 2.7 times for next year.

And in my opinion Aviva’s terrific cash-generative qualities should also copper-bottom its exceptional dividend prospects. The group saw cash remittances leap 40% last year to £1.3bn, helped by a 7% decline in operating expenses — to £3bn — and new business values rising 13% to £835m.

And recent interims confirmed the excellent progress Aviva is making worldwide, a terrific precursor for both earnings and dividend expansion. The value of new business rose 13% again during January-March to £228m, the insurer advised, driven by surging revenues across Europe and Asia.

With the firm’s streamlining scheme still having plenty left in the tank, and new business inflows continuing to surge across the globe, I believe that Aviva is a great stock selection for both growth and income investors.

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Royston does not own shares in Aviva.