FTSE 100 insurers like Aviva (LSE: AV) are popular shares for those hunting for a reliable passive income.
The inflation-proof nature of insurance products makes for steady earnings year after year. And reliable cash flows tend to mean reliable dividends.
This type of income source seems appealing right now after the UK just slipped into a ‘technical recession’. The sight of economic trouble can cause customers to flee from some sectors.
But by targeting ultra-safe defensive insurance stocks, I could target a consistent £100 a month – and I’d hope to receive that much money indefinitely.
Tempted
In fact, if I did receive that each and every month then I’d probably be downright disappointed. I want to invest in growing companies with rising dividends. Over time, I’d want my £100 monthly average to go up and up.
Creating such a high-quality passive income will require investing in high-quality companies, and I’m tempted to buy more shares in one of the UK’s largest insurance firms, Aviva.
The dividend yield at present is 7.14%, which is £714 back on a £10,000 investment. Rental yields can’t compete with that. Neither can the best savings accounts even in our high-interest environment.
Next year’s payout hasn’t been announced but analysts expect a further 6.97% increase.
Appetite
In terms of safety, last year’s dividend-per-share was 31p with earnings per share of 59p. So that’s covered nearly two times. Such a large buffer means cuts are unlikely in the short term.
As with any investment, it’s worth not getting too blinded by the big cash on offer. I also want to know what kind of threats the company is facing.
For Aviva, the firm is a huge enterprise with little room to grow. Mature companies sometimes achieve lower-than-average market returns despite often bumper dividend payments.
Those with an appetite for risk or a longer time horizon might find growth-orientated companies more to their liking.
How many?
So how many Aviva shares do I need to collect a £100 monthly income?
Well, 3,871 shares of Aviva would bring me £100 a month (or £1,200 a year) to the nearest pound. That using last year’s dividend yield too, so if anything, it’s on the low side.
In terms of cash outlay, I’d need to stump up £17,226 to buy that number of shares at the current share price.
While that’s not exactly small change, few investments offer such a passive income that I could start today.
As a sweetener, if current payouts continue then it would take about 10 years before my passive income would double and I’d receive £200 a month instead. That’s without adding anything extra either.
Perhaps it’s time for me to buy a few more Aviva shares.
