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When it comes to building income from shares, many UK investors look to household names like Tesco. With its trusted brand, leading market position, and reliable profitability, it's easy to see why supermarket stocks have become a staple for investors.
However, while Tesco offers defensive stability, its dividend yield of 3.65% for FY 2025 is not very high. There are also other celebrities FTSE 100 the stocks give the most.
High yield share
Come in Aviva (LSE: AV), one of the UK's leading insurance companies. With a forward dividend yield of 7% – almost double that of Tesco – the stock presents a very attractive income proposition.
Aviva has done a great job developing its business in recent years. It is selling off many of its overseas operations to focus on its key markets in the UK, Ireland and Canada.
This has started to show in its financial results. In the first half of the year, general insurance premiums increased by 15% year-on-year. Operating profit jumped 14% to £875m.
Interim dividend increased by 7%, the insurer said it intends to “other ordinary and continuous returns of capital“.
Meanwhile, the balance sheet is in good shape and management has ambitions to reach £2bn a year in operating profit by 2026, up from £1.7bn last year.
As for risks, the main one is that Aviva is facing an economic downturn. Meanwhile, declining commodity prices, lower investment returns, and rising claims can have a negative impact on profitability.
However, I think the potential reward of that 7% dividend yield outweighs these risks. I also became a shareholder last year.
How many shares will I need?
According to Statista, the average annual salary for a full-time worker in the UK in 2023 was less than £35k. If I could live on this income, I would need 98,658 Aviva shares to generate the required dividends.
Based on today's share price of 506p, that would be worth around £500,000.
Yes, most people don't have half a million left knocking. I know I never have. So I will have to build my portfolio over time. Fortunately, this is completely achievable.
For example, if I invest £250 each week in a Stocks and Dividends ISA, while earning an average return of 9%, I could reach £692,514 after 20 years. This assumes that I reinvest my earnings rather than spending them and that I can always earn that 9%, which is not guaranteed.
At this point, even a 7% yielding portfolio of this size would be generating £48,475 in annual tax-free dividends. This addition should help offset the erosion of purchasing power due to inflation over the past years.
Even better, I can hope for increased profits over time. Returning to Aviva, City analysts expect its payout to increase by around 7% each year until 2026. That means income from stocks bought today could rise more than 8% by 2026.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Diversity is key
While Aviva offers a tempting yield and is in a strong financial position, it is important to remember that no single dividend is a sure bet. Indeed, the company has cut its payout three times in the past two decades.
This is why I prefer a combination of equity stocks instead of opening one or two. By diversifying my portfolio and investing consistently over time, I can get closer to financial independence.
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