There’s a UK stock that I think can achieve a 7% annual return for me. That rate of return turns an initial £1,000 into an investment worth £7,878 over 30 years.
The company is Aviva (LSE:AV.B). But I’m not talking about the common equity – I’m looking at the preferred stock.
Dividends
Right now, Aviva’s 8.375% preferred equity trades at a price of £1.18 per share. It pays a dividend of 8.375p per year, which is a 7% yield.
Normally, there’s a risk with dividends that the payouts might be lower in the future. But that’s much less likely with Aviva preferred shares than most common equity investments.
The dividend is fixed – meaning that it can’t go up or down. And it has to be paid in full to investors before owners of common equity can be paid dividends.
In other words, if Aviva has a bad year or two and there isn’t enough cash to go round, owners of the preferred stock get paid first. That goes some way toward reducing the risk of a dividend cut.
There’s a chance the company might suspend its dividends entirely – and that netiher preferred nor common shareholders get anything at all. Even then, I’d rather own the stock with the fixed dividend.
If Aviva pays nothing at all for a year, the preferred share dividends accumulate. In other words, missed payments have to be made in full to shareholders before common stock dividends restart.
Risks
I think the risks with Aviva preferred is low relative to stocks. But there are a couple of ways in which I might live to regret opting to buy the shares.
The most obvious reason is if the underlying business grows significantly. As a preferred shareholder, I won’t receive anything extra in dividends if the company does well.
Right now, Aviva’s common shares have a dividend yield of 8%. If that goes up (or even stays where it is) in future, I’ll do worse as a result of having bought the preferred.
I’m not buying this stock because I think it’s going to have the biggest return on the stock market, though. I’m buying it because I see it as a relatively low-risk way of earning a 7% return.
Another way in which this could turn out to be a bad decision is if I have to sell the shares. The preferred is less liquid than the common equity, so I might be unable to get rid of it if I need the cash.
This is a risk that I can protect myself from, though. As long as I stick to only investing money that I won’t need in the near future, I can avoid the issue of having to sell the stock at all.
A stock to buy
I own Aviva preferred shares in my investment portfolio. At today’s prices, I see it as a good way to earn a steady 7% return.
If the share price increases, I might not be able to reinvest my dividends at a 7% return. But there are worse problems to have than the market value of a stock I own going up.
