From the perspective of dividend income, insurer Aviva (LSE: AV) has its attractions.
At the moment, for example, the shares offer a dividend yield of 7.6%. Not only that, but this year has already seen an increase of 8% in the insurer’s interim dividend.
Could the yield grow next year?
Dividend growth opportunity
First, rather than focussing on yield, let’s consider the dividend per share. Aviva actually made a big cut to its dividend in 2020. So while it is now growing again, the longer term picture has been more mixed.
An argument for the cut was that it helped put the Aviva dividend on a more sustainable footing. Aviva has gone through a significant business reshaping in recent years, with an increasing focus on its core market enabled by a strong of overseas disposals.
Aviva benefits from a large customer base, long insurance industry experience and strong branding. That could help it generate sizeable free cash flows.
The company has effectively indicated that it expects to keep growing its dividend annually. It said: “We expect to pay a dividend of c.£915m or c.33.4p for 2023, with low-to-mid single digit growth in the cash cost of the dividend thereafter“.
A 33.4p per share dividend for the current year would amount to a full-year rise of 8%, in line with the interim increase.
Nothing is ever guaranteed
That said, no dividend is ever assured. A company can always choose to cut or cancel its dividend at any time, as Aviva has shown in recent years.
While reshaping the company has brought some efficiency benefits and helped raise cash, it also means Aviva may well not produce the sorts of profits we have sometimes seen in the past. Focusing on its core market also means the business is less diversified, so it could be more affected if competitors in the UK try to undercut on pricing.
So although I reckon the Aviva dividend is set to keep growing in 2024 and beyond, that is not a certainty.
Yield could move up or down
But the absolute level of a dividend is only one of the things that determines what yield I earn if I buy the shares. The price I pay also affects my expected yield.
If its shares move down, the Aviva dividend yield could grow next year even before taking into account any dividend increase. But the converse is true. The 7.6% yield on offer today may not last forever.
I like the business and think its current valuation is attractive. From an income perspective, the shares could potentially offer me juicy and growing returns.
If I had spare cash to invest now, rather than waiting to see what happens to the yield next year, I would be happy to buy the shares for my portfolio.
