Aviva shares are set to yield 7.4%. Should I buy that income today?

Although I don’t expect Aviva shares to grow much, I do like the look of its dividend yield.

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Aviva (LSE: AV) shares aren’t what you would call whizzy. I wouldn’t buy them in the hope of enjoying rapid share price growth. I’d buy them for solid, reliable, long-term dividend income.

Perhaps I’m being harsh. Aviva shares have had their moments. Measured over two years, the FTSE 100 insurer is up 75%. Despite that purple patch, they still trade 25% lower over five years. Recent dividend history has been bumpy too.

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Today, Aviva shares would give me annual income of 5.3% a year. That is forecast to rise to 7.4% in the year ahead, nicely covered 1.5 times by earnings.

I like this top FTSE 100 income stock

Yet Aviva’s recent shareholder payouts reveals a more troubling picture. In April 2020, at the start of the pandemic, management axed the company’s dividend altogether. There’s no great shame in that, as management was under pressure from the regulator. Yet insurance rival Legal & General Group stood firm to pay out dividends of £750m.

Then in November 2020, new chief executive Amanda Blanc cut the dividend by a third to 21p. Blanc said the aim was to start restoring the payout as she worked to secure and simplify the business. Since then, progress has been patchy. In 2020, Aviva shares paid 27p. In 2021, that fell to 22.05p. 

So what does the future hold? Right now, Aviva shares trade at 12.8 times earnings. Their forecast valuation is a cut-price 9.7 times earnings. I love buying cheap FTSE 100 shares at reduced prices, but there is a proviso. 

At some point I want them to show some sign of life, so I don’t end up falling into a value trap. Which, judging by the last decade of underperformance, is a real danger when buying Aviva shares.

When Blanc took over, Aviva was all over the place. She tackled that by offloading its Italian, Turkish and French operations for £7.5bn. In total, eight non-core businesses have gone. The group is now a much leaner business, focused on its core UK, Ireland and Canada markets. 

I’d buy Aviva shares for income, not growth

Loyal shareholders are now glimpsing their rewards. In March, Aviva pledged to return £4.75bn though buybacks and dividends. The 2022 dividend will rise 40% to a forecast 31.5p per share. That swings the argument in favour of buying Aviva shares for me.

Last year’s results were a mixed bag (a bit like Aviva shares generally), with adjusted annual operating profit falling 10% to £1.63bn. Its workplace pensions and advisory platform did well, while retail annuities were weaker.

Yet the company does appear to be heading in the right direction, even if it has some way to go to catch up with rival L&G. I’d buy Aviva shares today, with the intention of holding them for years, to ride over further short-term bumps. I’d reinvest those dividends for growth today, then draw them as income when I finally retire.

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Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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