As with any investment in shares, the return from the FTSE 100 has been variable from time to time. But over the last 20 years, the index has generated an average of 6.89% per year for investors.
This is a pretty respectable return, in my book, but I think I can do better. There’s a stock I’ve been buying (and intend to keep buying) that I expect to produce more than 7% per year going forward.
Market-beating returns
At today’s prices, I reckon that Aviva (LSE:AV.B) shares are good for a 7% return from here on. But it’s not the common equity I’m looking at – it’s the preferred stock with the ticker LSE:AV.B.
The Motley Fool has a great explanation of the difference between the two here.
Why do I think this going to outperform the FTSE 100? Each share pays a dividend of 8.375p per year and is currently on sale for £1.19 today.
This implies a dividend yield of 7.04%, which is a little higher than the 6.89% the index has averaged over the last two decades. So the stock is priced today for a slightly better return than the FTSE 100.
Furthermore, that return is fixed. It isn’t going to go up in the future (so the stock wouldn’t be suitable for an investor looking for significant growth) but I think it’s a great choice for a steady 7% return.
Of course, beating the market isn’t guaranteed – the index might do unusually well over the next 20 years. But I don’t think this is likely with interest rates at their highest levels since 2008 and continuing to rise.
Dividend cuts
The usual concern with dividend stocks is there’s a danger that the dividend might be lowered or even stopped entirely. Persimmon shareholders have been finding this out lately.
With Aviva’s preferred shares, though, the risk for this happening is lower than it is with common stocks. Dividends for preferred shares have to be paid in full before any dividends can be paid to common equity holders.
Even if the company doesn’t pay dividends to preferred or common shareholders, it’s still not the end of the world. Missed payments to preferred owners have to be paid in full before common stock dividends can restart.
I see insurance as an inherently uncertain industry. This is especially true with life insurance, where a misjudgement in underwriting can lead to losses that really stack up over time.
That’s why I’d rather own the preferred shares than the common equity. The additional security of preferred stock goes some way towards offsetting the risk that comes with investing in the sector.
A stock to buy
I’ve been buying Aviva’s preferred shares for some time and I intend to keep doing so. The stock isn’t the most exciting, but a steady 7% return is attractive to me.
The biggest danger with it is the possibility of the price falling. Trading volume is low and it might be hard to sell it at a decent price – or even at all – if the price goes down significantly.
I don’t see this as major issue, though. In the case of Aviva, I’m not anticipating selling the stock at any point in the future – I’m looking to hold on to it and hopefully keep collecting a 7% return.
