Aviva shares yield 8%+. Should investors buy?

Aviva shares currently sport a monster dividend yield. Should investors buy the insurance stock for passive income, or is this a trap?

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Aviva (LSE: AV.) shares have fallen this year. As a result, they now sport a dividend yield of more than 8%.

Is this a great opportunity for those seeking dividend income? Let’s discuss.

Aviva is in good shape

Aviva appears to be in solid shape right now. In recent years, the insurer has undergone a massive transformation programme under CEO Amanda Blanc, and this appears to be bearing fruit.

For the first quarter of 2023, for example, the company posted an 11% rise in general insurance premiums, while health insurance sales rose 25% as more individuals and businesses opted for private cover.

We have delivered an encouraging start to 2023 and continue to build clear trading momentum. New business volumes are good, despite persistent economic uncertainty, and we delivered another quarter of strong growth across our diversified business,” said Blanc.

Looking ahead, the CEO was confident that the company can continue to deliver.

We have market leading positions in high growth areas. We are financially strong with an attractive and growing dividend, and we are confident in the prospects for Aviva,” she added.

This is all very encouraging. Unlike some other high yielders (e.g. tobacco companies), this doesn’t appear to be a company that’s facing major challenges.

Dividend analysis

As for the dividend, it looks sustainable in the near term. Currently, analysts expect the insurer to pay out 33.6p per share this year from earnings per share of 54.5p.

That gives a dividend coverage ratio of around 1.6, which is relatively healthy. And in the recent trading update, the company said that it’s aiming for “low-to-mid single-digit growth” in the cash cost of the dividend beyond 2023.

It’s worth noting that dividends are not the only form of capital returns here. Recently, Aviva has been buying back its own shares.

Last month, it completed its £300m share buyback programme, acquiring roughly 72.8m shares at an average price of 412p per share. Share buybacks tend to boost earnings per share over time, making a stock more attractive from a valuation perspective.

Valuation

Speaking of valuation, Aviva’s is really low right now. That forecast earnings figure of 54.5p per share I mentioned gives the stock a forward-looking P/E ratio of just 7.3. That’s well below the FTSE 100 average.

Risks

As for the risks, there are a few to be aware of here. One is that Aviva has a patchy long-term dividend track record. It has been known to slash its payouts when profits fall.

So there’s no guarantee the company will continue to pay massive dividends.

Another is higher interest rates. This could have a negative impact on the values of fixed-income assets on the company’s balance sheet and hit its profits.

A third risk is a spike in health insurance claims costs. Recently, several US insurers have reported higher costs following an increase in post-Covid surgeries.

On balance though, I think Aviva looks interesting from an income investing perspective. If generating income was my goal, I would definitely consider an investment here.

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.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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