For many dividend investors, 5% is the magic number. A 5% yield is generally considered to be a strong yield, and when you’re receiving that kind of return, from dividends alone, your portfolio can grow at quite an impressive rate. However, while a 5% yield is great, a 6% yield is even better. And the good news for income investors, is that after the recent stock market turbulence, there are many FTSE 100 companies now yielding 6% or higher. Here’s a look at one such company.
Insurance and asset management group Aviva (LSE: AV) has momentum at present. After a rough patch several years ago, the FTSE 100 firm implemented a turnaround strategy, and it appears to be paying off.
Indeed, the group released a very positive trading statement in late November, in which it stated that it was upgrading its growth, cash and dividend targets. The company explained that over the last four years, the group has been “streamlined” and that its financial and strategic position has been “transformed.”
Specifically, Aviva is now expecting earnings of growth of more than 5% annually from 2019. The company will also be deploying excess cash of £3bn in 2018/19 which will be used to repay debt, fund bolt-on acquisitions and provide additional returns to shareholders. Furthermore, the group said that it will be increasing its dividend payout ratio to 55%-60% of operating EPS by 2020.
Chief Executive Mark Wilson was upbeat, stating: “After a few years of restructuring, our businesses are now high quality and we expect good, sustainable growth from each of them.”
This announcement was great news for income investors. Big dividends are on the way. So what kind of yield can investors expect from Aviva?
6% dividend yield
The company will release its full-year results on 8 March. That’s when we will find out the dividend payment for FY2017. At this stage, analysts expect a dividend of 26.7p per share. At the current share price, that’s a yield of 5.4%.
However, looking ahead, analysts expect an even higher payout for FY2018. The dividend is forecast to grow by over 10% this year, taking the payout to 29.5p per share. At today’s share price, that’s a prospective yield of a mammoth 6%.
It’s worth noting that dividend coverage is expected to be close to two times in each year, indicating that Aviva can comfortably afford those payouts.
If a 6% yield isn’t attractive enough, what makes the investment case even more compelling is the incredibly low valuation of the stock. With analysts pencilling in earnings per share of 52.1p for last year, the P/E ratio is just 9.4. That valuation provides plenty of margin for error, in my view.
Given Aviva’s high yield and low valuation, I believe the stock is a solid pick for those seeking big dividends. I’ve been adding to my own holding recently, taking advantage of the big yield on offer.
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Edward Sheldon owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.