One of the things I love about owning shares in blue-chip dividend stocks is the stream of income they can provide. Take insurance Aviva (LSE: AV) for example. Aviva’s dividend yield is already 7.2%, meaning that for every £1,000 invested today a shareholder will hopefully receive £72 in dividends next year.
In fact, given its recent history of increasing earnings per share each year, the earnings prospects may be even better than that. No dividend is ever guaranteed (and indeed, Aviva is cutting its payout in 2020) but I see this as a stock investors should consider.
Dividend prospects are strong
First, I like the fact that the company has shown that it can generate large amounts of excess cash. That is useful because it can be used to fund shareholder payments in the form of dividends.
Demand for insurance is likely to remain high. There may not be much growth in demand as Aviva operates in mature markets such as the UK and Canada. But there can still be revenue growth with price increases.
In addition, Aviva may seek to increase its market share by acquiring competitors – a topic that has been in the headlines this week. It also makes efforts to sell policyholders other products (millions of its UK customers already have multiple policies with the company).
That will hopefully support strong revenue generation. That could underline continued year-over-year dividend growth, which management has indicated is their plan. With a 7.2% yield, almost double FTSE 100 average, I see Aviva’s dividend could be very profitable.
Long-term stock price growth potential
Furthermore, I think Aviva shares could turn out to be money not only because of the income, but also in terms of how the price looks today compared to what it might reach in the long term.
With a price-to-earnings ratio in the (just) single digits, the stock looks like a bargain to me. The total market capitalization is estimated at £12.6bn. However, Aviva has shown great potential to generate revenue over the years.
It has a strong product, a large customer base and under current management is very focused on a small number of core markets. I see that as good in its long-term profit potential.
An assignment to consider
Of course, Aviva has looked promising in the past only to disappoint. That 2020 dividend cut put the finances in a better position, but it hurt existing shareholders.
UK insurance is competitive (not that this is obvious from current premium levels) too I watch out for the risk of a value-focused competitor in the coming years trying to undercut the big boys like Aviva. Given its reliance on the UK market that could hurt revenue and earnings.
Still, it has an attractive price and a high dividend yield, so I think it’s a share investors should consider.
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