Passive income investors often focus on how much income a portfolio generates today. But the real secret to building a meaningful income stream is owning businesses that can increase their dividends year after year.
That’s because even modest dividend growth can have a dramatic impact over time. A £20,000 Stocks and Shares ISA yielding 4% would generate £800 a year initially. But if that income grows consistently, the annual payout could be significantly higher a decade from now without adding another penny.
For investors looking to build a growing passive income stream, that’s where the biggest opportunity often lies.
The power of dividend growth
To illustrate the impact of dividend growth, the table below shows how an initial £800 annual income could increase over the next decade under different growth assumptions.
| Annual dividend growth | Income today | Income after 10 years |
| 4% | £800 | £1,184 |
| 6% | £800 | £1,433 |
| 8% | £800 | £1,727 |
The starting income is identical in every scenario. The difference is how quickly the underlying companies increase their payouts over time.
That’s why, when building a passive income portfolio, I pay close attention to a company’s ability to grow earnings and dividends consistently. Over the long run, that can have a far greater impact on income than simply chasing the highest yield available today.
One FTSE 100 stock I believe has the potential to deliver that kind of dividend growth is Aviva (LSE: AV.).
A capital return compounding machine
The insurer has already delivered on its medium-term targets a year early, allowing management to reset ambitions through to 2028. That matters because it signals the business is running ahead of plan, rather than simply meeting expectations.
The first pillar is cash generation. The group is now targeting cumulative cash remittances of more than £7bn out to 2028.
To put that into context, last year cash remittances totalled nearly £2.1bn. This is a key metric because dividends are ultimately funded from this cash generation.
Alongside this, the insurer has restarted share buybacks at £350m, reflecting both strong capital generation and the higher share count following the Direct Line acquisition.
The second pillar is earnings growth. The company is targeting operating earnings per share growth of around 11% per year.
This is being supported by disciplined underwriting and a more simplified, focused business model. Management is also targeting an IFRS return on equity of around 20%, highlighting the underlying profitability of the group.
The third pillar is the shift towards capital-light, higher-return businesses. Wealth and asset management are becoming increasingly important. Today, it manages £234bn, up from £147bn in 2022.
This shift is being reinforced by the over 7m customers holding two or more policies. The opportunity for cross-selling products is quietly improving both retention and profitability.
Bottom line
Insurance remains a cyclical business. Recent softer pricing in home and motor markets could pressure underwriting margins, in what is a very competitive industry.
However, Aviva has been meaningfully reshaped in recent years. Cash generation is strong, the Direct Line deal adds scale, and capital returns remain central to the investment case.
In my view, this is a classic FTSE 100 compounder where growing dividends can steadily support long-term passive income.
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Andrew Mackie owns shares in Aviva.
