Aviva (LSE: AV) shares have long been popular with retail investors for the income they throw off. Indeed, the company regularly features in broker lists of the week’s most popular buys.
But does a very low valuation make these even more of a no-brainer buy?
Inflation-busting yield
Before addressing that question, let’s just dwell on that dividend stream.
As things stand, Aviva shares yield a mighty 8.6%. That’s so high it’s even above the most recent published rate of inflation of 7.9%. Based on my research, only six other companies in the FTSE 100 offer this kind of income.
Seen from this perspective, the stock has undeniable appeal.
That said, it’s worth remembering that there’s no such thing as a safe bet when it comes to generating dividends from the stock market. That aforementioned yield is based on analyst forecasts and these are subject to change.
How likely is it that this money will be paid out?
Current trading
I reckon there’s a good chance. In its most recent update, Aviva said it was likely to deliver roughly £700m in group operating profit for the first half of the year. Profit in the whole of 2023 was expected to be 5-7% higher compared to 2022.
Interim numbers will be confirmed in mid-August.
Poor performer
As encouraging as the company’s recent trading has been however, the trajectory of this stock is still worrying.
Put simply, Aviva shares have performed very poorly in recent times. If I’d invested five years ago, for example, my position would now be down 40%.
By comparison, the FTSE 100 index is flat (albeit with quite a bit of volatility over that period). So my overall return would still have been better if I’d just bought and held a bog standard index tracker and sat on my hands.
That’s the case even after dividends have been factored into the equation.
Cheap FTSE 100 stock
Perhaps then, it’s no surprise that this company is so lowly valued.
Aviva shares trade on a price-to-earnings (P/E) ratio of just eight for the current year. That’s cheaper than the average for a company in the financial sector. It’s also cheap compared to the UK stock market as a whole.
So it would appear that a lot of negativity is already priced in. If Aviva (and/or the UK economy) is able to even slightly surprise on the upside, the stock could rally.
Clearly, expectations should be kept in check. Investors here will never enjoy the sort of gains seen in glitzy tech stocks from across the pond.
Longer-term however, I’m confident that the gradual increase in the age of the UK population should help to drive demand for the company’s products and services.
So buying now could prove to be a great move, in time.
My verdict
As things stand, I would be tempted to add Aviva shares to my portfolio if I had the available cash. Notwithstanding the multiple economic headwinds we face, the price just seems too low and that dividend yield is undeniably compelling.
Even so, I would make a point of ensuring that I was also invested in other stocks away from the financial sector and with better track records when it came to growing investors’ money.
