I am an investor with a keen eye for income opportunities. I have been looking into the merits (and risks) of Aviva (LSE: AV) shares as a potential addition to my portfolio.
The company’s dividend yield stands at 4.8%. That means owning the shares could provide a useful boost to my passive income streams.
So, could now be a good moment for me to add the shares to my portfolio?
Smaller and more focused
In the past several years, the firm has undergone a strategic transformation. Selling many foreign assets has generated some cash for shareholders. It has focused the firm more clearly on its home UK market.
But it has also meant that buying into Aviva now is not like investing in the Aviva of a few years ago. Revenues last year were 35% lower than in 2019. Profits after tax also came in 30% lower.
Aviva’s asset sales make me think that lower revenues are the new norm at the firm compared with a few years ago. Profits tend to move around in the insurance industry from year to year, even when a business is stable.
While profits have shrunk, last year they still came in higher than in both 2017 and 2018, for example. That might suggest a leaner, more strategic Aviva could actually turn out to be more profitable than before.
Dividend growth potential
The 4.8% yield I mentioned is based on last year’s total payout. At the interim stage this year, the company increased its dividend by 40%. If it maintains that level of increase at the full-year level, then the prospective dividend yield here is 6.7%. That would take the annual dividend to around 31p per share, surpassing where it was in 2018 before a big cut.
Aviva has suggested this is its plan. In a trading update in November, it maintained market guidance that it was aiming to pay a total dividend per share of around 31p for last year and 32.5p this year.
I appreciate the stock’s income potential. I see it as being underpinned by resilient customer demand, a strong brand and deep industry expertise.
I’m eyeing the shares
But while I like the company’s outlook, I have not yet invested in it. I see other insurance shares that could benefit from strong businesses and offer an even beefier yield, such as 7.1%-yielding Legal & General. Like Aviva, it aims to increase its shareholder payout this year although, in reality, dividends are never guaranteed.
Meanwhile, like its peers, Aviva faces risks. Inflation could make claim settlement more expensive, eating into profits. A leaner business than before may struggle to generate the sorts of profits seen last year all the way through the economic cycle.
For now, I continue to watch Aviva shares, but I am not buying.
