Trying on the annual shareholder payout from insurer Aviva (LSE: AV), I like what I see. In the mean time the Aviva dividend yield is 7%.
I feel it might go greater from right here. So, ought to I make investments?
Promising dividend outlook
Let me begin by explaining why I’m upbeat about what may occur to the payout. In any case, it’s just some years since we noticed an Aviva dividend minimize (a reminder that no payout is ever assured to final).
Created utilizing TradingView
There are a few methods one may take a look at this so far as I’m involved.
One is to say that insurance coverage is a cyclical enterprise – charges go up and underwriters do effectively, then sooner or later they fall once more throughout the trade and earnings shrink.
One other evaluation is that Aviva has traditionally been a ragbag of various companies, however underneath present administration has change into extra focussed and has now put its dividend on a extra sustainable footing than was the case.
Which of those is extra true (as each could also be legitimate), solely time will inform. However I feel there’s a lot to love in regards to the enterprise outlook for the insurer, from its massive buyer base, robust place within the UK market, and model to its confirmed underwriting capabilities.
The dividend grew by 7.7% final yr. The yield is already 7%. So if the dividend progress charge can proceed at its present degree, the possible yield a few years from now can be 8% and inside 5 years, the FTSE 100 share can be yielding a juicy 9%.
Balancing dangers and rewards
Present administration of the corporate strikes me as competent and real looking. So, for the Aviva dividend to continue to grow at a robust clip, the enterprise efficiency might want to assist it.
Usually when wanting on the sustainability of a dividend, I take a look at a agency’s free money stream.
Can that assist right here, although? Have a look at the chart.
Created utilizing TradingView
Like a variety of monetary providers corporations (particularly insurers), free money stream doesn’t assist me as a lot because it might. It displays monies coming out and in that don’t essentially illustrate the underlying well being of the corporate.
So I pay extra consideration to how a lot surplus capital Aviva generates, as it may use that to assist fund its dividend.
Right here, I feel issues look promising. In its full-year outcomes for final yr, the corporate introduced a share buyback. It additionally introduced the money price of its dividend is about to continue to grow by mid-single digits every year. That could possibly be, for instance, 5% — however because the buyback reduces the variety of shares, that would imply the next per share progress within the payout.
If I had spare money to take a position, the potential of a rising Aviva dividend would make me wish to add this revenue share to my portfolio.
