There was good news for passive income fans in the annual results published today (27 February) by insurer Aviva (LSE: AV). The FTSE 100 firm announced a 7% increase in its annual dividend. That means the Aviva dividend now stands at 35.7p per share.
That is lucrative. Indeed, at the current share price it equates to a prospective dividend yield of 6.7%. The ex-dividend date for the 2024 final dividend (23.8p per share) is not until 10 April, so buyers of the share in coming weeks could still qualify.
But while that sort of yield and growth grabs my attention, is it sustainable? After all, no dividend is ever guaranteed to last and Aviva did slash its payout in 2020.
Evidence that Aviva’s strategy is working
Aviva is now a fairly different business in some ways to five years ago though. The essence may have remained largely unchanged, but there has been a strategic refocus on the core UK market. That has involved disposing of multiple overseas assets, returning some of the cash to shareholders along the way.
Such an approach can offer economies as scale, but might be seen as increasing concentration risk. Aviva’s fortunes are now more closely tied to the UK than before. Aviva is the country’s leading diversified insurer and has over 20m customers globally.
Its proposed takeover of Direct Line will help it build further scale, while unlocking an estimated £125m per year of cost savings due to getting rid of duplicated activities in the two companies.
Last year, Aviva grew its adjusted operating profit by a fifth to £1.8bn. It is targeting £2bn by 2026.
Why insurance shares can be high-yield
Insurers tend not be very exciting businesses. When they have growth prospects – and Aviva does, thanks to moves like the Direct Line takeover – they do not always get full credit from investors.
So when it comes to the investment case, dividends matter. Boards know that. It is no surprise that, alongside Aviva, some other big FTSE 100 dividend payers are in the insurance business, such as Phoenix with its 10.3% yield and 8.4%-yielding Legal & General.
That means that, while cuts sometimes happen – weak markets can hurt investment returns, eating into profits – insurers realise that dividend growth can make them more attractive to investors. Of course, that depends on the business performance being strong enough to fund it.
I reckon the dividend can keep on getting bigger
Aviva’s stated aim is “mid-single digit (percentage) growth in the cash cost of the dividend”. In other words, it expects to spend somewhere around 5% more each year on paying dividends than it did the prior year.
Note that this growth is in the “cash cost” not dividend per share. Why? By buying back its own shares, Aviva has been reducing its share count. That means fewer shares in circulation. That allows it to grow its dividend per share by, say, 7% without the overall cost of doing so growing by quite as much.
Aviva does face challenges. Integrating Direct Line could distract management from running what is already a vast, complex business. But if the business keeps performing well, I see room for the Aviva dividend to keep growing from here.
That could make it a share to consider for passive income.
This post was originally published on Motley Fool
