A passive approach to stock investing can work well while collecting income from dividends. Let’s face it, there’s more to life than obsessing over company reports and share-price charts — and we don’t have to.
As long as DIY investors are prepared to do some initial research when choosing businesses and stocks, a diversified portfolio of holdings may serve well over the long term.
A programme of dividend reinvestment
Nevertheless, great investors like billionaire Warren Buffett have beaten the returns of the general stock market by dedicating their lives to the game.
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By his own records, Buffett’s long-term compounded annual gain is running at just under 20%. But America’s S&P 500 index has delivered a compounded annual gain of just over 10% over the same decades since the 1960s.
For many investors, gains compounding at around 10% a year on average could build to a tidy sum over years and decades. But to aim for that kind of progress, I reckon it’s important to plough those passive dividend income gains back into stocks along the way to hopefully keep the pot growing.
But what should we buy? Well, my favourite passive income stock right now is Aviva (LSE: AV.), the UK-based insurance, wealth, and retirement business operating in the wider financial sector.
As I write (29 August), the share price is in the ballpark of 506p. That puts the forward-looking dividend yield for 2025 at just over 7.5% and, to me, the valuation makes the stock look cheap.
There aren’t many bank accounts that will give me interest as high as that. So is Aviva a no-brainer? No it isn’t. Stocks and shares are not as safe as bank accounts. There’s always risk involved when committing money to shares.
For example, company directors have the power to trim or stop dividends at will. And they often do if the underlying business hits a setback. On top of that, share prices can go down as well as up. So the money we invest in shares can rise and fall in value.
The dividend looks set to rise further
Another risk for Aviva is that its operations have a fair amount of sensitivity to general economic cycles. So if we see another half-decent recession or a global economic slowdown, its possible — likely even — that Aviva’s profits could take a dive.
If that happens, the share price will likely move lower and, as mentioned, the directors may even reduce the dividends.
But I wouldn’t write-off Aviva just because of those risks. I think the company’s worth deeper research and consideration right now. It may be worth weighing up as one potential holding in a portfolio of several stocks.
Since 2019, the dividend’s risen a little every year, and City analysts expect further increases in 2024 and 2025. A strong dividend record like that speaks volumes about the strength of underlying operations and the directors’ positive view about the outlook for the business.
Aviva’s trading well and the valuation looks modest. That’s why it’s one of my favourite passive income stocks to consider buying now.
