I want to boost my passive income stream through dividends. One stock I believe can help me do this is Aviva (LSE:AV).
Insurance giant
As a quick reminder, Aviva is the largest insurance company in the UK. It can count over 15.5m customers on its books and has roots stretching back over 300 years.
So what’s the current state of play with the Aviva share price? Well, as I write, the shares are trading for 404p. At this time last year, the shares were trading for 538p, which is a 24% drop over a 12-month period.
Aviva shares have fallen in recent weeks, even after the stock market correction. At its annual general meeting earlier this month, controversy around alleged sexist comments towards CEO Amanda Blanc had an effect on the share price.
A passive income stock with risks
The biggest risk with any dividend-paying stock is that of dividends being cancelled. It is worth remembering dividends are not guaranteed and can be cancelled at any time at the discretion of the board. Aviva cancelled its dividend in 2020 in the face of the pandemic, like many other companies did.
Another issue I have with Aviva is its debt levels as well as its ongoing transformation towards a leaner business structure. I like the fact it has decided to sell non-core businesses but this is easier said than done. It also intends to pay down debt. My issue is how much of this money raised will pay down debt, be reinvested into growth of the core territories, and also returned to shareholders? A balance will need to be struck.
The bull case
Firstly, insurance businesses have defensive capabilities, in my opinion. In times of economic uncertainty, like now due to soaring inflation, rising interest rates, and the cost of living crisis, insurance is still a must. This is for consumers and businesses alike.
So what about the fundamentals? Well, Aviva shares currently have a dividend yield of just over 7%. This is nearly double the FTSE 100 average of 3%-4%. As a passive income seeker, this is extremely enticing.
As mentioned above, Aviva decided to reshape its business by selling non-core businesses and focusing on core territories such as the UK, Ireland, and Canada. I think this is a bold move, and one that will benefit the business and shareholders alike in the longer term. A leaner, more efficient business can only be a good thing. Part of this sale has been a commitment to return £4bn to investors before the end of 2022. That started today.
On paper, Aviva shares look good value for money too on a price-to-earnings ratio of just seven. This is lower than the FTSE 100 average of 15, which tells me that the shares could be undervalued.
Overall I think Aviva looks like a good opportunity currently. At current levels the shares look like value for money and it is one of the biggest insurance businesses in the UK. The current share buyback and investor return initiatives, coupled with transforming the business to a leaner entity, have helped me make my decision. I’d add the shares to my holdings to boost my passive income stream.
