Aviva (LSE: AV) share price in 2023 was 33.4 %. The stock yields 6.8% at the current share price of £4.92.
On the contrary, i FTSE 100The current rate is 3.6%. This is lower, fortunately, than the 'risk-free' rate (10-year UK government bond yield) of 3.9% currently. And stocks are risk free.
On paper the difference between Aviva's yield and the FTSE 100 looks significant enough. But over time, the difference in returns is even greater than that.
Differences in unbundled returns
I started investing in shares 35 years ago with about £9,000, so I'll use these numbers here.
£9,000 invested across the FTSE 100, which yields an average of 3.6%, will make £324 in dividends in the first year. So over 10 years on the same basis, the return would be £3,240, and over 35 years £11,340.
This would provide an annual income of £408 if the yield was 3.6% at the time. Passive income is money made with little effort – mostly dividends from stocks, in my opinion.
Not exactly bad, but a lot could be made from £9,000 of Aviva shares which yield 6.8%.
In the first year, the return here will be £612. Over 10 years on the same basis, it would be £6,120 and after 35 years £21,420. This will generate an annual income of £1,457 if the yield remains at 6.8% over that period.
The difference is even greater with integration
That said, if investors used dividends to buy additional shares in each stock the difference in returns would be even greater.
This is known as 'dividend compounding' and is the same concept as leaving interest to accumulate in a bank account.
Doing so would increase the return on the broader FTSE 100 which is holding at £3,893 after 10 years, given the same yield of 3.6%. This will rise to £22,669 after 35 years. Adding to the initial investment of £9,000 will cost the holding £31,669 over that period. It will pay an annual income of £1,140.
In comparison, Aviva holding an average yield of 6.8% would have produced a return of £8,731 after 10 years. After 35 years, it would have jumped to £87,593.
In addition to the initial stake of £9,000, the total investment will be worth £96,593. It will pay an annual income of £6,568 – almost six times the FTSE 100's dividend.
How is the company looking to move forward?
There are risks in all companies, and Aviva is no different. Its profit margins may be reduced by intense competition in the sector. Resurgence in the cost of living may cause customers to cancel policies.
However, consensus analyst estimates are that revenue will increase by 7.2% annually through 2026. Such increases tend to result in higher energy shares over time.
Indeed, analysts predict that Aviva's dividend payments this year, next year, and 2026 will, respectively, be 35.9p, 38.6p, and 41.4p.
This would give yields on the current stock price of 7.3%, 7.8%, and 8.4%.
I already own Aviva shares and am happy with that position. If I didn't have it, I would buy the stock today for this great passive opportunity.
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