The FTSE 100 certainly offers investors some good dividend yields. The index is filled with established companies that often trade at a discount relative to their American peers. So, as a value investor with a preference for dividend-paying stocks, the index is a great place for me to invest.
Today, I’m looking at Aviva (LSE:AV.), which offers investors a sizeable 7.6% dividend yield. It’s one of the biggest yielding stocks on the index, and it’s down 10% over a month following the Silicon Valley Bank fiasco.
But as we know, sometimes it’s wise not to trust stocks with big dividend yields. So, is Aviva a good buy or is this a stock worth avoiding? Let’s take a closer look.
Thrashing expectations
On 9 March, Aviva posted a better-than-expected 35% rise in annual operating profit and announced a £300m share buyback. Profits for the year to 31 December came in at £2.2bn against a company-compiled consensus of £1.75bn. The sharp increase was driven by a rise in life and general policy sales. The total dividend for the year was set at 31p a share, in line with expectations.
After the announcement, the share price pushed upwards before tanking as fear swept across the financial sector following the collapse of SVB.
Low P/E
Like many UK-listed financial stocks, Aviva trades with a low price-to-earnings rate, around 6.5. That’s around half the index average.
But there are several reasons for this. For one, Aviva doesn’t offer a huge amount of long-term share price growth. Over five years, the stock is down 15%. Although, if I had bought during the first lockdown — three years ago — I’d be up 57% today.
There’s also the fact that high yielding stocks often don’t offer much in the way of share price growth, because they favour rewarding shareholders through dividends over share buybacks. Although, it is worth noting that Aviva recently unveiled a £300m share buyback programme.
In underlining the above point, the average total returns of FTSE 100 stocks is around 8% or 9%. But in the case of Aviva, shareholders will receive 7.5% in dividends, plus or minus any share price growth.
Would I buy Aviva stock?
Personally, I like investing in relatively stable, even boring, stocks with strong dividend yields.
Going forward, Aviva warned that customers should brace for increases in the cost of cover after double-digit rises in 2022 as the company faced surging costs for repair bills. And that could present a challenge if customers start looking elsewhere for better deals.
However, the thing is, other insurers are in the same boat, so there might not be any choice for existing customers. But in my opinion, I’d rather see Aviva keep ahead of rising premiums. After all, we saw what happened to Direct Line — it was taken by surprise when premiums rose in 2022.
Would I buy Aviva? Well I already own the stock, but I’m planning to buy more in the current dip. I think it’s undervalued at around 400p.
This post was originally published on Motley Fool
