The Aviva (LSE:AV.) share price has flown at the start of 2024. Yet at 480p per share, the life insurance giant still offers dividend yields that trump those of most other blue-chip shares.
For 2024, the FTSE 100 company carries a gigantic 7.1% dividend yield. This is far ahead of the index’s 3.8% forward average. And things get even better for next year. For 2025, the yield on Aviva shares marches to 7.7%.
But of course dividends are never guaranteed. And a sudden economic shock could put current payout forecasts in danger.
So how realistic are current City projections? And should I buy the Footsie firm for my portfolio?
Dividend growth
Financial services companies like this have struggled of late due to higher interest rates crimping consumer spending power. This could remain a problem too if severe inflationary pressures persist.
But for the moment, analysts expect Aviva’s earnings to bounce back sharply over the short term. Bottom line increases of 17% and 11% are forecast for 2024 and 2025 respectively.
These bubbly forecasts support City expectations that dividends will keep growing during this period. Last year’s 33.4p per share payout is tipped to rise to 34.22p in 2024, and again to 37.33p next year.
Weak dividend cover
It’s my opinion that Aviva is well placed to meet these payout estimates too. On the downside, predicted dividends are covered just 1.3 times by expected earnings for each of the next two years. This is below the accepted security benchmark of 2 times.
But as an Aviva shareholder myself, this weak reading doesn’t overly concern me. And it’s not just because the company has regularly paid a large and growing dividend despite having a long history of weak dividend cover.
Strong balance sheet
It’s also because the life insurance giant is, put simply, a cash machine. The regular premiums it receives generate huge amounts of cash and underpin a rock-solid dividend sheet.
While Aviva’s Solvency II capital ratio fell last year, it remained at what Hargreaves Lansdown has described as a “formidable” 207% as of December.
Its strong capital base has allowed Aviva to announce a further £300m share repurchase programme in recent weeks. It also means the business plans to increase the dividends it pays moving forwards.
This month it upgraded its dividend guidance and predicted annual payout growth in the mid-single digits. This is up from the low-to-mid single digits it had previously touted.
A top dividend stock
Of course dividends can never be taken for granted. And in the case of Aviva, a prolonged economic downturn in the UK could hamper its payout plans. It also has to overcome significant competition across its product categories.
Yet I still expect the FTSE firm to make good on the City’s dividend forecasts for this year and next, and to deliver large and rising cash rewards beyond this period.
Substantial restructuring in recent years has rebuilt the balance sheet to impressive levels. And demographic changes mean the company has terrific opportunities to grow profits in areas like bulk annuities and wealth management.
On balance, I think Aviva shares are a brilliant investment for dividend investors to consider.
