First of all, investing shouldn't be complicated. That means finding high-quality companies with easy-to-understand business models that pay sustainable, market-leading dividends. Among all the actions of FTSE 100, Aviva (LSE: AV.) really catches my attention.
7.8% dividend yield
Firstly there is a juicy dividend yield of almost 8%. This is comfortably above the current inflation rate. I may not be among the highest paying in the FTSE 100, but what matters most to me is sustainability.
During the pandemic, it shocked the market by cutting its dividend. But putting that aside, payments have increased steadily over the last decade.
In its first half 2023 results, Aviva increased its interim dividend by 8% to 11.1p. With an expected annual payout of around £915m, that translates to a final payout of 22.3p. This will be paid in April 2024.
Wealth: the engine of growth
In order to count on growing dividend payments in the future, I need to have confidence that the business can continue to grow.
Although its Wealth division represents a small percentage of overall operating profits, I believe it offers some of the most interesting growth opportunities.
Over the next 10 years, this market is expected to almost triple to £4.3 trillion. The infographic below shows the breadth of their Wealth business today.
It already has market-leading positions in workplace and advice platform businesses and continues to invest in growth opportunities in advice and direct wealth. This includes the acquisition of Succession Wealth, helping to tap into the growing need for retirement advice.
Its own research report on retiring in the 2050s shows that 73% of people retiring now would be interested in receiving support to ensure they don't run out of money in retirement.
It aims to grow wealth to £250bn in assets under management and £280m in profits within five years. If it succeeds, I expect its stock price to rise considerably in the future.
Risks
Its share price has performed poorly over the past year because, as an asset and investment manager, it has invested heavily in corporate and government bonds.
Last year's banking crisis exposed the problem of unrealized losses on balance sheets. But of course, this problem only matters to a company that is forced to sell its bonds before maturity.
Currently, it has a Solvency II ratio of 202%. That should allow you to weather a normal economic downturn and the associated market volatility. However, if bond yields were to rise significantly, large losses could not be ruled out.
Despite these clear risks, Aviva is exposed to a number of tailwinds. The growth of electric vehicles on our roads over the next 10 years is likely to mean the emergence of new insurance business models.
For example, Aviva Zero, a carbon-conscious digital engine proposition, is an important innovation in this space. It has already sold more than 250,000 policies since launching less than 18 months ago.
I view Aviva shares as a sleeping giant and will look to add more to my portfolio when finances allow.
