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Investing for passive income is my favorite way to build wealth over time. I FTSE 100 is full of businesses that offer dividend yields north of 5%, but there is one outstanding stock that really excites me today.
Dividend growth
In its H1 results back in August, the insurance giant Aviva (LSE: AV.) raised its interim dividend by 7% to 11.9p per share (DPS). The amount paid in 2024 is forecast to be 35.5p, which means a rise of 6.1% in 2023.
Last year, it paid out a total of £906m in dividends and continues to drive mid-digit growth in dividend capital. Not surprisingly, analysts have penciled in a budget rise of 40.9p by 2026. That puts you at a meaty forward yield of 8.5%.
It also bought back £300m of its own shares earlier this year.
Opportunities for structural growth
Supporting future shareholder returns are many of the factors driving growth in all of its markets. This includes occupational pensions, which are the most important of them.
Today, fewer than four in 10 people save enough for retirement. There is also a growing ‘advice gap’ when it comes to saving for a pension.
Saving for retirement today is more complicated than it was in previous generations. One important reason for this is the shift from Defined Benefit (DB) to Defined Contribution (DC) pension plans. The effect of this is to transfer risk from employers to employees.
The Financial Conduct Authority (FCA) has recently published a Review of the Limits of Advice Guidance. The report paints a picture of how many people are saving properly for retirement.
Two shocking facts stood out to me. First, most employees remain invested in fixed funds chosen by employers throughout the life of the savings product. Secondly, too many consumers are withdrawing from their pension pots at an unmanageable rate.
I expect the pension savings market to improve in the coming decades. Indeed, with an aging population it will be necessary. But with the market expected to triple over the next 10 years to £5trn, Aviva will be a significant beneficiary.
Important risks
Like all insurance businesses, Aviva invests its premiums and fees earned in a variety of financial assets.
Therefore, it needs to manage three major buckets of risks: credit risk, liquidity risk and market risk. The global financial crisis back in 2008 and Liz Truss’s infamous budget for 2022 highlight how unpredictable ‘black swan’ events can destroy balance sheets.
Over the past three years, the world economy has experienced 40-year high inflation and record high interest rates. This has led to a cost of living crisis and a ballooning government deficit. If a recession occurs in 2025, insurance stocks will undoubtedly be hit hard.
Despite these risks, I invest with a long-term horizon. In the past few years, under the leadership of Amanda Blanc, the business has completely transformed itself. It has lost a lot of underperforming assets and is now firmly entrenched in the UK and Ireland as well as Canada.
Over the past few weeks, the stock has seen a slight pullback. I took the opportunity to add to my holding accordingly.
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