Aged over 50, I am looking to optimise my second income from share dividends for an all-around better retirement. But that does not simply mean picking stocks with high yields today.

It also requires assessing whether those payouts can be sustained for years to come. And that means looking deeper into the underlying business to judge its long‑term profit trajectory.

A welcome by‑product of identifying such shares is that they are often priced below their ‘fair value’. If so, there is the potential for capital gains over time, given the historical tendency of asset prices to move towards fair value in the long run.

How much second income from this stock?

Analysts forecast FTSE 100 insurance and investment giant Aviva’s (LSE: AV) dividend yield will rise to 6.7% this year, 7.2% next year, and 7.7% in 2028, although these can go down and up over time.

A £20,000 investment now would generate £23,089 in dividends after 10 years. And over 30 years — the length of a standard long-term investment cycle — this would rise to £180,007.

The figures are based on the forecast 7.7% as an average and on the dividends being reinvested in the stock. This harnesses the full turbocharging effect of dividend compounding on returns.

After 30 years, the total value of the holding (including the original £20,000 stake) would be £200,007. And that would be paying an annual second income from dividends alone of £15,401!

Well-supported by the underlying business?

Aviva’s latest results showed operating profit rose 25% year on year to £2.2bn. It underlined the strength of its diversified model and the benefits of recent acquisitions. Meanwhile, operating earnings per share climbed 17% to 56p, reflecting both higher profits and the contribution from capital‑light businesses.

These trends illustrate how Aviva’s scale, cost‑efficiency and growing wealth and health franchises can continue to drive earnings growth ahead. And these in turn support the forecast trajectory of rising dividends 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. Another is increased competition that could force Aviva to cut margins.

That said, analysts forecast that its profits will grow by a strong average of 14.5% a year over the medium term at minimum.

Share price gains too?

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

When those forecasts are less certain, investors demand higher returns, which raises the discount rate. Analysts’ DCF valuations vary because they rely on different inputs. Under my own assumptions — including a 7.4% discount rate — Aviva looks 47% undervalued at its current £6.30.

That places fair value around £11.89 — nearly double the current price. So if markets continue to correct mispricing over time, this could be an excellent buying opportunity if those DCF assumptions prove correct.

My investment view

Aviva has strong profit drivers in place that look set to push its dividend yield and share price higher over time. Consequently, I will buy more of the shares very soon.

I also have my eye on other deeply undervalued high-yield stocks in other sectors. 

Simon Watkins owns shares in Aviva.