Making passive income is a goal that I think most people have. After all, what’s not to like about making money without having to exert much effort? In this regard, buying FTSE 100 stocks that pay out a dividend is an attractive way to do this. One company that is appealing in this regard is Aviva (LSE:AV). The UK-based insurance company pays out a regular dividend. So should Aviva shares be top of my wishlist right now?
Reasons to like Aviva shares
One element that really appeals to me when thinking about buying Aviva shares for income is the business model it has. As an insurance company, it has a fairly low-risk model. It has multiple lines of income, including savings and retirement, annuities and protection products.
Profitability grows with increased assets under management and repeat business. Given that for many people, different forms of insurance are a necessity rather than a choice, retention of business is strong over time.
For an income investor, this model makes Aviva shares appealing to buy. The revenue and profitability from insurance allows high cash generation. As of February this year, liquidity stood at £4.1bn. This allows Aviva to pay out some of these funds to shareholders as dividends. Currently the dividend yield is 5.34%. This makes it one of the highest yielding stocks within the FTSE 100 index.
Having a high yield is one thing, but looking at Aviva, I think it’s sustainable as well. The outlook seems promising as the company looks to focus on key markets. The firm made the choice recently to sell off some areas of the business. Aviva Italy, Turkey and France are all being disposed off.
This has two benefits that I can see. Firstly, it slims down the business, allowing it to be more focused on profitable areas. Second, it boosts its cash, giving even further liquidity that could be paid out to income investors holding Aviva shares.
Thoughts for income investors
Of course, there are always risks associated with buying any share and Aviva is no different. With my income hat on, I want to identify issues that could make the firm cut the dividend in the future. This would restrict the passive income I would generate.
In this regard, I’m still unsure about some of the other markets that Aviva has legacy operations in. These include the likes of Canada, India and China. Although Canada is a profitable (and growing area) that Aviva is pushing, I’m unsure as to whether it should consolidate further and just focus on the UK and Ireland. Trying to be a player in such a range of different markets globally might be more of a risk than an opportunity.
Even with selling off of some European units, the benefits of efficiency could take a while to show through. In this interim period, higher costs of integrating its remaining arms could be a headache.
Yet on balance, I think Aviva shares are one of the best FTSE 100 dividend buys. Given that the share price has also risen 33% over the past year, it looks like I’m not the only one thinking this.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
jonathansmith1 has no position in any share mentioned. 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.