One of the things I like about owning shares in blue-chip dividend shares is the passive income streams they can potentially offer. Take insurer Aviva (LSE: AV) as an example. The Aviva dividend yield is already 7.2%, meaning that for every £1,000 invested today a shareholder would hopefully receive £72 in dividends annually in future.
In fact, given its recent track record of growing the payout per share each year, the income prospects may be even better than that. No dividend is ever guaranteed (and indeed, Aviva reduced its payout in 2020) but I see this as a stock investors should consider.
Solid dividend prospects
For starters, I like the fact that the company has proved it is able to generate sizeable amounts of excess cash. That is helpful because it can be used to fund shareholder payouts in the form of dividends.
Demand for insurance is likely to stay high. There may not be much growth in demand as Aviva operates in mature markets like the UK and Canada. But there could still be growth in revenues through pricing increases.
On top of that, Aviva may seek to increase its market share by acquiring rivals — a topic that has been in the news this week. It is also making efforts to sell existing policyholders other products (millions of its UK clients already hold multiple policies with the firm).
That will hopefully support strong cash generation. That could underpin ongoing dividend growth each year, which management has indicated is its plan. With a 7.2% yield, around twice the FTSE 100 average, I see the Aviva dividend as potentially lucrative.
Long-term share price growth potential
On top of that, I reckon that Aviva shares could turn out to be a bargain not just because of the income potential, but also in terms of how the share price looks today compared to what it might reach over the long term.
With a price-to-earnings ratio in single digits (just), the stock looks like a possible bargain to me. The total market capitalisation is around £12.6bn. Yet Aviva has proven serious cash generation potential over the course of many years.
It has a strong brand, large customer base and under current management has focused more sharply on a smaller number of core markets. I see that as good for its long-term profit potential.
A share to consider
Of course, Aviva has looked promising in the past only to disappoint. That 2020 dividend cut put the finances on a better footing, but was painful for existing shareholders.
UK insurance is competitive (not that this is obvious from current premium levels) and I see a risk of a price-focused rival in coming years trying to undercut the big boys like Aviva. Given its reliance on the UK market that could hurt revenues and earnings.
Still, priced attractively and with a high dividend yield, I think it is a share investors should consider.
The post With their 7.2% dividend yield, are Aviva shares a bargain? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
