Trying on the annual shareholder payout from insurer Aviva (LSE: AV), I like what I see. In the meanwhile the Aviva dividend yield is 7%.

I feel it may go larger from right here. So, ought to I make investments?

Promising dividend outlook

Let me begin by explaining why I’m upbeat about what may occur to the payout. In spite of everything, it’s only a few years since we noticed an Aviva dividend reduce (a reminder that no payout is ever assured to final).

^{Created utilizing TradingView}

There are a few methods one may take a look at this so far as I’m involved.

One is to say that insurance coverage is a cyclical enterprise – charges go up and underwriters do nicely, then in some unspecified time in the future they fall once more throughout the trade and earnings shrink.

One other analysis is that Aviva has traditionally been a ragbag of various companies, however underneath present administration has develop into extra focussed and has now put its dividend on a extra sustainable footing than was the case.

Which of those is extra true (as each could also be legitimate), solely time will inform. However I feel there’s a lot to love in regards to the enterprise outlook for the insurer, from its massive buyer base, sturdy place within the UK market, and model to its confirmed underwriting capabilities.

The dividend grew by 7.7% final yr. The yield is already 7%. So if the dividend development charge can proceed at its present degree, the potential yield a few years from now can be 8% and inside 5 years, the FTSE 100 share can be yielding a juicy 9%.

Balancing dangers and rewards

Present administration of the corporate strikes me as competent and reasonable. So, for the Aviva dividend to continue to grow at a powerful clip, the enterprise efficiency might want to help it.

Typically when wanting on the sustainability of a dividend, I take a look at a agency’s free money circulation.

Can that assist right here, although? Have a look at the chart.

^{Created utilizing TradingView}

Like quite a lot of monetary companies companies (particularly insurers), free money circulation doesn’t assist me as a lot because it may. It displays monies coming out and in that don’t essentially illustrate the underlying well being of the corporate.

So I pay extra consideration to how a lot surplus capital Aviva generates, as it might probably use that to assist fund its dividend.

Right here, I feel issues look promising. In its full-year outcomes for final yr, the corporate introduced a share buyback. It additionally introduced the money price of its dividend is about to continue to grow by mid-single digits annually. That could possibly be, for instance, 5% — however because the buyback reduces the variety of shares, that might imply a better per share development within the payout.

If I had spare money to take a position, the potential of a rising Aviva dividend would make me need to add this revenue share to my portfolio.