How much do I need to invest in this FTSE 100 dividend gem to aim for £15,401 a year in second income!

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I’m over 50 and looking to optimize my second income from dividends for a better retirement overall. But this doesn’t mean simply choosing stocks with high yields today.

It also requires evaluating whether these payments can be maintained for years to come. This means looking deeper into the underlying business to judge its long-term earnings trajectory.

A welcome byproduct of identifying such stocks is that they are often priced below their “fair value.” If so, there is potential for capital gains over time, given the historical tendency for asset prices to move toward fair value over the long term.

How much is the second income from this stock?

Analysts’ expectations FTSE 100 index Insurance and investment giant AvivaThe dividend yield (LSE:AV) will rise to 6.7% this year, 7.2% next year, and 7.7% in 2028, although it could fall as well as rise over time.

An investment of £20,000 now will generate profits of £23,089 after 10 years. Over 30 years – the length of a standard long-term investment cycle – this will rise to £180,007.

These numbers are based on a forecast of 7.7% on average and on dividends reinvested in the stock. This exploits the full effect of turbocharging to maximize profits on returns.

After 30 years, the total value of the property (including the original share of £20,000) will be £200,007. That would be a second annual income payment from dividends alone of £15,401!

Well supported by the core business?

Aviva’s latest results showed operating profits rose 25% year-on-year to £2.2 billion. It emphasized the strength of its diversified model and the benefits of recent acquisitions. Meanwhile, operating earnings per share rose 17% to 56p, reflecting higher profits and the contribution of capital-light companies.

These trends demonstrate how Aviva’s scale, cost-efficiency and growing wealth and health franchises can continue to drive earnings growth forward. This, in turn, supports the expected path of rising profits over the coming years.

One risk is any tightening in regulatory capital requirements that could limit Aviva’s ability to return excess cash to shareholders. The other reason is increased competition which may force Aviva to reduce profit margins.

However, analysts expect its earnings to grow at a solid average of 14.5% per year over at least the medium term.

To understand where a stock should trade, many investors turn to discounted cash flow (DCF) analysis. This projects the future cash flows of the underlying business and discounts them back to today.

When these expectations are less certain, investors demand higher returns, which leads to a higher discount rate. Analysts’ assessments of DCF differ because they depend on different inputs. On my own assumptions – including a discount rate of 7.4% – Aviva looks undervalued by 47% at its current price of £6.30.

This makes the fair value around £11.89 – almost double the current price. So, if markets continue to correct mispricing over time, this could be an excellent buying opportunity if the DCF assumptions prove correct.

My investment perspective

Aviva has strong earnings engines that look poised to push its dividend yield and share price higher over time. Hence I will buy more shares very soon.