When analysing dividend shares, I concentrate on extra than simply the yield. A wholesome payout ratio, constant dividend progress and powerful fundamentals are all a part of the equation. I wish to see firms that may not solely preserve their dividends but in addition develop them steadily over time with out compromising their monetary place.

Whereas looking for revenue shares to prime up in June, I seen two of my long-term holdings – Aviva (LSE:AV.) and Phoenix Group (LSE:PHNX) – have climbed practically 30% this yr. That form of efficiency usually displays bettering investor confidence and, on this case, I believe it’s partly down to renewed optimism within the UK insurance coverage sector.

Falling inflation, stabilising rates of interest and improved funds have helped the sector look extra enticing in 2024. However earlier than I contemplate shopping for extra, I made a decision to evaluate whether or not the latest rally’s sustainable.

Aviva

On the floor, Aviva nonetheless seems to be like an honest revenue play. It presents a strong dividend yield of 5.73% and has grown its payout for 5 consecutive years at a mean fee of 6.9%.

Nevertheless, that progress will not be solely sustainable. The present dividend payout ratio sits at a hefty 152%, which implies the corporate is distributing greater than it earns – by no means a long-term answer.

There are deeper issues beneath the bonnet. Earnings dropped by 38% yr on yr, and return on capital employed (ROCE) is simply 3%, suggesting a scarcity of effectivity in turning capital into revenue. Extra alarmingly, income missed expectations by a major 36% in 2024 – a transparent signal the enterprise is struggling to fulfill progress targets.

Additionally, it looks as if Aviva has a behavior of slashing its dividend each six to seven years, usually following a interval of poor efficiency or strategic reshuffling. So whereas I nonetheless imagine Aviva’s a dependable revenue inventory, I don’t plan to extend my holding till I see extra constant earnings and income supply.

Phoenix Group

Phoenix Group boasts one of many highest yields on the FTSE 100, at the moment paying 8.2%. The insurer has elevated its dividend for 10 consecutive years and has turn into a mainstay for income-focused buyers. In its newest outcomes, it managed to extend its money place by over 20% whereas shaving round 6% off its debt.

However the latest rally could possibly be masking deeper monetary vulnerabilities. Regardless of bettering outcomes, the corporate nonetheless posted a £1bn loss for the FY2024, and whereas its money technology is mostly sturdy, the stability sheet provides me pause. Phoenix holds £4.18bn in debt towards simply £1.75bn in fairness — a worrying giant discrepancy that might restrict monetary flexibility, particularly if rates of interest stay elevated.

For now, I’ll maintain my place as I stay enthusiastic concerning the beneficiant dividend however I’m not inclined so as to add extra shares at this stage. The yield’s tempting, however the underlying profitability wants to enhance earlier than I contemplate topping up.

For the time being, I believe there could also be higher alternatives to contemplate elsewhere. Particularly, UK housebuilders and actual property funding trusts (REITs), the place valuations look compelling and revenue potential stays sturdy.