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I am true believer that investing in the stock market for passive income is the safest and easiest way to build long-term wealth. The recent sell-off in many FTSE 100 blue-chip stocks has meant the value of my portfolio has taken a tumble. But it has also provided me with an opportunity to buy shares on the cheap and lock in even more attractive dividend yields.
Magic of compounding
One stock that I have owned in my portfolio for years is insurance giant Aviva (LSE: AV.). I still rate the business as one of the best investments out there for passive income. Indeed, it regularly appears in list of top 10 equities owned by ISA millionaires.
After the recent share price fall, the stock yields 6.8%. Analysts forecast that by 2026, dividend per share could rise by 12%. That makes for a market-beating forward yield of 7.8%.
If an investor was to buy £10,000 of the stock today and reinvested their dividends, they would double their money in just over 10 years. That assumes no share price appreciation and a 5% yearly dividend increase.
Of course, this is a theoretical example. The dividend could get cut (which is what happened during Covid). The share price may fall, wiping out the dividend increase. Nevertheless, it highlights the power of compounding over time.
Future growth drivers
Identifying high-yielding stock is only one part of the equation. An investor needs to be confident that a company can keep growing its earnings to support future dividend payments.
I believe that Aviva is well placed to take advantage of a number of structural growth opportunities. Pension provision is one area that is expected to grow significantly in the coming decades. Indeed, the market is expected to triple over the next 10 years and be worth £5trn.
One area that the business is really concentrating its efforts on is the growing advice gap. As final salary pension schemes have all but gone in the private sector, individuals more than ever need advice on the best ways to grow their pension pots over time.
Far too many people today trust to luck that they will have enough in retirement and only 40% take any advice at all. Indeed, a recent survey highlighted that many employees have no idea where their workplace pensions are invested. Many stick with employer default funds, which are wholly inappropriate for their needs.
Risks
Like all insurance businesses, Aviva invests the premiums it receives in the stock and bond markets. Wild volatility swings in either of these markets can directly impact the value of its assets on the balance sheet.
In the UK specifically, the rise in national insurance contributions could result in a number of negative outcomes. One is stunting wage increases thereby dampening contributions to workplace pensions.
But when I look at what the business has achieved over the last five years, I remain very buoyant for its future prospects. The recent acquisition of Direct Line Group highlights to me that a growth mindset pervades all levels of the organisation. The synergies between the two businesses are compelling to me. I will, therefore, continue to add to my holding when finances allow.
