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A lot of investors like the prospect of share price growth over the long term, but with steady passive income along the way in the form of dividends. Not only has Aviva (LSE: AV) lately been trading at its highest share price for years, but the dividend has been growing steadily. Currently the yield stands at 5.9%.
So, is the FTSE 100 insurer a share income seekers ought to consider?
A steady industry, but with occasional storms
Although Aviva has been growing the annual dividend per share handily over the past few years, that has not always been the case. No dividend is ever guaranteed to last, after all. Aviva demonstrated that when it cut the dividend per share five years ago.
Insurance is a business sector with many desirable characteristics from an investor’s perspective. Demand is high, resilient, and largely predictable. The business model is proven and can be lucrative for many years on the go. As the insurer with the most customers in the UK, Aviva is well-positioned to benefit from such factors.
However, that strength also exposes it to risks. A lot of competition in the market can lead an underwriter to write policies at levels that hurt profitability. That was one of the challenges for rival Direct Line, which Aviva is in the process of taking over.
That takeover could help grow the business and give Aviva even greater economies of scale in the UK market. But it brings an additional concentration risk given the company’s strong reliance on the UK as its key market. It also risks distracting Aviva management’s attention from the rest of the business.
Lots to like here, including the yield
With the FTSE 100 currently yielding 3.6% on average, the Aviva dividend at its current share price is over 60% more lucrative than its peer group of leading blue-chip firms. For investors with an eye on long-term passive income streams, I think that could be attractive.
Not only that, but the payout per share will hopefully grow over time, subject to risks such as the ones I mentioned above. Aviva’s dividend policy is to “grow the cash cost of the dividend by mid-single digits”.
In other words, annual growth ought to come in at around 3%-7%. That is not in the dividend per share, but what it costs Aviva to pay. So if the firm buys back its own shares and cancels them (as it has repeatedly done in recent years), there will be an expanded pool of cash and fewer shares to divvy it up amongst. Therefore, annual dividend per share growth could exceed the mid-single-digits percentage increase of the cash cost.
Meanwhile, the business looks well set for the long term. Share price growth of 28% over the past year partly reflects City optimism about future prospects, in my view.
For a long-term buy and hold investor with an eye on earning income in years or even decades to come thanks to dividends, I certainly see Aviva as a share worth considering.
