Aviva (LSE: AV) shares now yield an incredible 9.4%. That number is so staggering, I had to double check it. The insurance giant has been one of my favourite FTSE 100 stocks for years, but now its dividend income is off the chart.
My first instinct is to buy, buy, buy, but then another thought hit me. One reason the dividend is so high is that the Aviva share price has performed poorly. It is down 25.97% over the last year. Over five years, it is down 42.09%. Am I in danger of stumbling into a value trap?
Anybody looking at the FTSE 100 insurer’s share price chart will see a massive crash in May, but don’t be misled. The slump was down to Aviva’s share consolidation, which included a new B share scheme designed that has just returned a staggering £4.75bn to shareholders.
Aviva shares look incredibly cheap
Aviva still looks like a bargain as its shares are valued at a dirt-cheap 7.2 times earnings. Coupled with that dividend, they look like a buy to me.
The problem is that I’ve been saying that for years. I’ve just stumbled across an article I wrote in 2013, entitled: Why I’m Fed Up With Aviva. I concluded: “Turning this wayward, lumbering beast around [is] going to take time.”
Nine years later I find myself delivering pretty much the same analysis. So what have I learned from this trip down memory lane?
With Aviva, low share price growth looks built in. Today’s valuation isn’t an unmissable buying opportunity, but par for the course. Management has spent the last decade offloading non-core assets and slashing costs, but the stock still fails to grow.
That’s just how Aviva rolls.
Yet I’d still buy it today. If Aviva’s main attraction Aviva is its income stream, then I might as well invest when that is off the chart. As far as I’m concerned, 9.40% is off the charts. Especially since the dividend is still covered a fairly healthy 1.5 times earnings.
I’m not expecting Aviva shares to suddenly start rocketing. Although from today’s low starting point, I can surely hope for some share price growth.
Even if I don’t get it, that sky-high dividend yield, second only to Persimmon on the FTSE 100, will return my money in just 11 years.
Also, one of the purposes of my portfolio is to build up a passive income stream for my retirement. Aviva’s shares look brilliantly placed to do that.
The underlying business is doing reasonably well, as revenues from general insurance have just hit a 10-year high.
The group is on track to deliver savings of £750m by 2024, and chief executive Amanda Blanc is keen to reward loyal shareholders. She plans to pay dividends totalling £870m this year, rising to £915m in 2023.
The Aviva share price may go nowhere fast, but its juicy yield should make it worth the ride.