A superb 7.7% forecast yield! Time for me to buy more of this FTSE passive income superstar?
Legendary investor Warren Buffett captured the essence of passive income, in my view. He said:âIf you donât find a way to make money while you sleep, you will work until you die.â
The best way I have found of doing this is through dividend income paid by shares. The only real effort here is choosing the right stocks in the first place, and then periodically monitoring their progress.
One such share in my passive income portfolio is Aviva (LSE: AV). Its recent share price drop has pushed the dividend even higher. This means my regular income from the stock should increase over time.
So, should I buy more now?
What yield am I after and why?
Dividend yields can change, as share prices move and annual payouts alter — while my minimum long-term requirement remains at around 7% a year.
The reason for this figure is that it acts as compensation for the additional risk of investing in shares over no risk at all. Taking no risk at all is reflected in the ârisk-free rateâ (the 10-year UK gilt yield), which is currently 4.7%. I see the extra return as reasonable compensation.
By contrast, the present average FTSE 100 dividend yield is just 3.1% and the FTSE 250âs just 3.3%.
On a rising trend?
Avivaâs current dividend yield is 6.4% — below the minimum I want. However, analysts forecast that the insurance and investment giant will raise its payouts to 41.6p this year, 44.7p next year, and 46.9p in 2028.
This is in line with rising forecasts for the firmâs earnings growth. This is ultimately what powers any firmâs dividend (and share price) higher over time. In Avivaâs case, the projections are for average annual growth here of 45% over the medium term.
A risk to these numbers is a further surge in the cost of living that may prompt investors to close accounts.
Even so, the expected dividends would generate respective annual dividend yields of 6.8%, 7.3%, and 7.7%. It is clearly a rising trend, ending well above my required 7%.
How much passive income?
My £20,000 holding in Aviva on the (admittedly not guaranteed) 7.7% average yield would make my £23,089 in passive income over 10 years. Over 30 years, this would rise to £180,007.
This matches the classic 30-year investment horizon â starting in oneâs early 20s and running to around age 50, when earlyâretirement options emerge.
These numbers also reflect the dividends being reinvested into the stock over the period to harness the power of âdividend compoundingâ.
By the end of the 30-year period, my holding would be worth £200,007. This would be paying me a yearly income from dividends of £15,401. And all with very little effort from me.
My investment view
The dividend yield forecasts for Aviva are strong and the long-term passive income it can generate is high.
My discounted cash flow analysis (including a 7.2% discount rate) also highlights a potential 52% undervaluation in the share price. Other analystsâ projections may be more conservative, but this strongly suggests there could be meaningful long-term price gains too.
Given this, I will keep my holding and am also looking at other high-yielding stocks that have caught my eye. I think it is worth other investors’ consideration too.
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Simon Watkins has positions in Aviva Plc. 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.
