Aviva (LSE:AV) has been caught up in the general FTSE 100 sell-off today. Aviva shares are down 8.5% today, but still up 5.8% over one year. Some (including myself) like the look of the stock for income purposes. With the dividend yield now at 7.61%, should I jump at the chance to buy?
Noting the share price tumble
As far as I can tell, there’s no specific reason today for the move lower. However, the moves in the market so far this week are a negative for the business.
UK assets in general are being sold aggressively. The British pound has fallen to its lowest level against the US dollar since 1985. Government bonds have dropped so sharply that the Bank of England had to issue a statement today saying that it would buy an unlimited amount of bonds in order to support the market.
Even though I think of Aviva as being a large player in the insurance market, it has divisions in pensions and investment management. The performance of these departments is likely going to be poor, given the sell-off in asset prices. It could lead to investors pulling their money out of Aviva funds. This would lower revenue, as the firm earns money based on the size of the assets under management.
Not a rational move
The above is the thought process that I think some Aviva shareholders had today as they sold their holdings. Yet it should be noted that the company hasn’t come out with any trading update to confirm any concerns.
If anything, I think the market is overreacting. Aviva has a diversified range of revenue streams, some of which (such as insurance), shouldn’t be badly impacted by the events over the past week. If the Bank of England restores some form of balance to the currency and bond markets in coming weeks, I think the panic should be over.
If I’m correct in this regard, it speaks to why now could be a good time for me to buy Aviva shares for income. After all, if company performance isn’t going to be materially impacted, profits should ensure the dividend payout remains the same.
Buying Aviva shares for income
Assuming the dividend per share stays the same, a lower share price helps me to increase my purchasing power. After all, the dividend yield calculation is just the annual dividend per share figure divided by the current share price. Granted, the share price moves every second. But that’s why buying on a day when the stock is down 8.5% makes sense to me.
The main risk I see is if the share price continues to fall after I’ve purchased. Even with a high yield above 7%, I could face a loss on my investment if the share price moves lower in coming months. To try and solve for this, I want to invest money that I feel I won’t be needing within the next year at least. This should reduce the chance of me needing to sell the stock prematurely for cash at a loss.
I’m pretty sure that I’ll buy Aviva shares in coming days.
