If I’d invested £1,000 in Aviva (LSE:AV) shares five years ago, I’d have had a disappointing time. But there is a way that I could have invested in the company that would have yielded better returns.
Five years ago, the Aviva share price was 525.40p. For £1,000, I could have bought around 190 Aviva shares.
Today, the stock is around 429.60p. So from my initial £1,000, I’d have lost £180.90 through share price decline.
I’d have made some of that back in dividends, though. Over the last five years, Aviva has paid out 101.25p per share in dividends. So my 190 shares would have brought in £192.38 in dividends.
That would leave me with a positive total return of £11.48. Undeniably, I’d have made money. But I don’t think that this is a great return on a £1,000 investment made five years ago.
A better alternative
If I’d bought Aviva’s preferred stock, however, I’d have had better results. Five years ago, the price of Aviva’s 8.75% preferred shares – which trade on the London Stock Exchange under the ticker AV.A – was 156p. So for my £1,000 five years ago, I could have bought 641 shares.
Today, Aviva’s preferred stock has a share price of 143.25p. As such, I’d have lost £81.70 as a result of the declining share price. In other words, both the common stock and the preferred shares have declined over the last five years, but the common stock has declined by more.
Aviva’s preferred stock comes with a preferred dividend. Over the past five years, the preferred stock has paid out 43.75p per share. With 641 shares, I’d have brought in £280.44 in dividends.
Overall, if I’d invested £1,000 in Aviva’s preferred stock five years ago, I’d have made £198.74. I still don’t see that as an amazing return on a £1,000 investment over five years. But I do think that it’s a better return than I’d have got from buying the common stock.
There are other advantages to preferred stock as well. The dividend paid on Aviva common stock has been highly irregular. It’s been up and down a fair bit over the last five years, making it quite hard to predict for someone interested in using the dividend to generate passive income.
With the preferred stock, the story is different. Where the amount that the company pays out to holders of common shares is variable and up to management to decide, Aviva’s 8.75% preferred stock pays a dividend of 4.375p per share twice each year.
This dividend is fixed and management doesn’t have an option to lower it. It does have an option to decide not to pay the dividend in any year, but if it does this, then the dividend rolls over and the outstanding amount has to be paid in full before it can pay a dividend to common stockholders.
Over the past five years, Aviva’s preferred stock has outperformed the common equity. I don’t normally buy preferred shares, since they have a limited upside as well as a limited downside. But with Aviva shares having performed poorly over the past five years, I’d rather own the preferred stock today.