Is FTSE 100 company Aviva a no-brainer stock for dividend investors?

There’s no denying Aviva’s high dividend yield and the momentum in the business. But is it a stock to buy for an income portfolio?

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Insurance, wealth, and retirement business Aviva (LSE: AV) is a stock that often ends up in share portfolios focused on dividend income.

But is the company a good option for reliable ongoing dividends, or should investors look elsewhere?

Let’s kick the tyres a bit to judge whether it’s worth further and deeper research and consideration.

Around half the revenue comes from the UK with the rest originating in geographies like Canada and Europe. So that’s a tick on my checklist because it helps to minimise the exposure of the business to single-country risk.

Cyclical vulnerabilities

However, there’s no denying the company operates in a sector that’s exposed to cyclical influences. It’s in the wider financial industry and that’s always buffeted by the ups and downs of the general economy.

So I’d put a question mark on the checklist for that point. And I’d single it out as an area to focus on with further research.

The longer-term share price chart tells the story of the stock’s cyclicality. The price action over several years has been essentially sideways with many undulations along the way.

But for the ideal dividend stock, I’d want a gradually rising share price over time. And that would be backed by rising revenue cash flow, earnings and shareholder dividends. In other words, gentle and steady growth in the business rather than the see-saw performance we often see with the more-cyclical enterprises.

Aviva’s multi-year dividend record earns another question mark on my checklist.

In April 2020, the directors announced their intention to withdraw the final dividend for the 2019 trading year. And they took that decision “in the wake of the unprecedented challenges COVID-19 presents for businesses, households and customers”. 

At the time, regulatory authorities were urging insurers to exercise restraint on dividend payments. But the move was painful for Aviva shareholders and the total dividend payment for the year declined by around 48%.

However, Aviva used the situation to rebase dividends lower. And even now, the annual payment per share is yet to reach pre-Covid levels. 

Good trading and an optimistic outlook

That outcome is disappointing. And I reckon it points again to the weaknesses in the business because of its cyclical vulnerabilities. Indeed, not all companies stopped or reduced dividends through the pandemic. And some have continued with a progressive dividend policy as if the pandemic never happened.

Examples of firms with high yields and a strong dividend performance through the pandemic include names such as British American TobaccoNational Grid and Hargreaves Lansdown. And those stocks are worth consideration now alongside Aviva.

In May, Aviva’s chief executive Amanda Blanc said the business had an “encouraging” start to 2023 and trading momentum has been building.

Blanc acknowledged persistent general economic uncertainty but said there was “strong growth” across the business despite that.

Looking ahead, Blanc thinks the company’s leading positions in growth areas of the market will drive positive outcomes for Aviva in the years ahead.

Meanwhile, City analysts expect robust single-digit percentage growth in the dividend for this year and next. And set against those expectations the forward-looking yield is running near 8% with the share price near 399p.

I see that valuation and the current momentum in the business as attractive. However, I wouldn’t describe Aviva as a no-brainer opportunity. It requires careful research before plunging into the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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