Investing for passive income is my preferred means of building wealth over time. The FTSE 100 is jam packed with businesses that offer a dividend yield north of 5%, but there’s one standout stock that really excites me today.
Growing dividends
In its H1 results back in August, insurance giant Aviva (LSE: AV.) lifted its interim dividend by 7% to 11.9p per share (DPS). The total payout in 2024 is predicted to be 35.5p, which represents a 6.1% increase on 2023.
Last year, it paid out a total of £906m in dividends and continues to guide for mid-single-digit growth in the cash cost of dividends. It’s little wonder that analysts have pencilled in the dividend rising to 40.9p by 2026. That puts it on a forward yield of a meaty 8.5%.
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On top of that it bought back £300m of its own shares earlier in the year.
Structural growth opportunities
Supporting future shareholder returns are a number of growth drivers across all of its markets. This includes workplace pensions, in which it’s the number one provider.
Today, fewer than four in 10 individuals are saving enough for retirement. There’s also a growing ‘advice gap’ when it comes to pension savings.
Saving for retirement today is much more complicated than it was for past generations. One key reason for this, is the move from Defined Benefit (DB) to Defined Contribution (DC) pension schemes. The effect of this is to transfer risk from employers to employees.
The Financial Conduct Authority (FCA) recently published its Advice Guidance Boundary Review. The report paints a picture that envisages large swathes of the population sleepwalking into inadequate savings during retirement.
Two alarming facts stood out for me. Firstly, the vast majority of employees remain invested in their employers’ chosen default funds throughout the life of the savings product. Secondly, too many consumers withdraw from their pension pots at an unsustainable rate.
I expect the pensions savings market to evolve over the coming decades. Indeed, with an ageing population it will have to. But with a market that’s expected to triple over the next 10 years to £5trn, Aviva will be a key beneficiary.
Key risks
Like all insurance businesses, Aviva invests its premiums and fees received across various financial assets.
As such, it needs to manage three main buckets of risks: credit risk, liquidity risk and market risk. The global financial crisis back in 2008 as well as the infamous Liz Truss budget in 2022 highlight how unpredictable ‘black swan’ events can destroy balance sheets.
Over the past three years, the global economy has witnessed 40-year high inflation and a record rise in interest rates. This has led to a cost-of-living crisis and ballooning government deficits. Should a recession ensue in 2025, insurance stocks will undoubtedly be hit hard.
Despite these risks, I invest with a long-term horizon. Over the past few years, under the leadership of Amanda Blanc, the business has completed transformed itself. It has divested itself of many underperforming assets and is now firmly focused on the UK and Ireland plus Canada.
Over the past few weeks, the stock has seen a small pullback. I took the opportunity to add to my holdings accordingly.
