When it comes to a second income, sometimes it’s good to work backwards, asking myself what I want to achieve and then trying to figure out a way to realise it.
Those of us investing for a second income may have a figure in mind. Let’s say £10,000 a year.
While it could be possible to achieve that with one stock, I wouldn’t want to put all my eggs in one basket.
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Instead, I’d look to spread my risk by investing in a handful of dividend stocks. Not too few that my portfolio lacks diversity, but not too many that I can’t adequately research them all.
A five-way split, might fit the bill. Meaning I’d target £2,000 in dividends from each holding.
Insurance companies are certainly popular among passive income investors. These are firms with strong cash flows and typically large dividends.
The company
Aviva (LSE:AV.) is a multinational insurance firm. After a restructuring which saw businesses in countries like France and Turkey sold off, the firm now has around 18.7m customers, predominately in the UK, Ireland and Canada. In fact, it’s the UK’s largest general insurer.
The sale of non-core businesses was only the start of a wider cost reduction and rationalisation programme. The cost-cutting initiatives, started by CEO Amanda Blanc in 2020, has driven £750m in cumulative gross savings.
Today, Aviva is a much more streamlined business which a commanding position in the UK’s general insurance and retirement market.
The dividend
Aviva currently offers a 7.7% dividend yield. That puts it among the top 10 dividend payers on the FTSE 100. In 2022, the insurer paid 31p per share.
However, it’s crucial to exercise caution when evaluating sizeable dividend yields. In the case of Aviva, the dividend coverage, which indicates how comfortably the company can sustain its dividend payments from its earnings, doesn’t appear to be strong.
Analysts are now expecting earnings per share to come in at 29.3p for the full year. That’s an improvement from 2022 when the company reported loss of 38.2p.
However, this 2023 project is far below earnings per share of 50.1p in 2021 and the stated dividends for 2022. Going forward, analysts suggest 41.4p in 2024 and 47.1p in 2025.
Nonetheless, I’d be surprised to see Aviva cuts its dividend. There are accounting considerations and reporting methods can differ.
All in all, Aviva has strong financials and the earnings are expected to improve year on year. Operating profits in H1 jumped 8% year-on-year to £715m.
I’d need 4,182 Aviva shares to earn £2,000 in dividends.
Undervalued
Aviva, like several of its peers in the insurance sector, tends to favour rewarding shareholders in the form of dividends rather than share buybacks. This means the share price can lack momentum.
Of course, it’s also worth bearing in mind that insurance isn’t the most exciting or innovative sector to invest in. That’s especially the case with Aviva which operates is fairly mature markets.
Nonetheless, Aviva is a solid investment choice. It’s currently trading at 13.5 times forward earnings, which actually makes it expensive versus its peers.
However, there’s a strong forecast and the company will likely benefit from positive trends in bulk purchase annuity. It’s a stock I’m considering.
