When looking at the best FTSE 100 stock to invest in, one might be tempted to look for those that are beating the market.
For example, Rolls-Royce shares have appreciated by 119% in 2023, whereas the Footsie has remained flat.
While I believe that Rolls-Royce is a potentially rewarding investment, it’s not always that simple.
Warren Buffett has a famous quote that says investors should “be fearful when others are greedy, and greedy when others are fearful”.
For me, this means that sometimes the best stocks over the long term are the ones that have fallen significantly in value over the short term.
Aviva (LSE:AV) shares have fallen by almost 15% in 2023. However, there’s a case to be made for it to be the best FTSE 100 stock right now.
Risks in the insurance industry
I’m not particularly surprised by the fall in Aviva shares.
The insurance industry is influenced by the wider economy, which hasn’t been in a great state recently. When there’s an economic downturn, policyholders tend to take a second look at their insurance coverage.
Moreover, investors were spooked back in March during the US banking crisis. This is because they were concerned about potential unrealised bond losses at insurance firms.
However, as an investor with a long time horizon, I’m not so fussed about the state of the economy in the short run.
The British Chambers of Commerce recently published its economic forecast for 2024 and 2025. It’s predicting growth of 0.4% and 0.7%, respectively. Meanwhile, inflation is on schedule to reach the government’s 2% target by the second quarter of 2025.
While this is quite slow progress, it’s a sign that the economy is moving in the right direction.
As the economy continues to get better from its current state, the demand for insurance products should grow too, as businesses expand and people are less frugal with their spending.
This will be good for the long-term prospects of insurance companies, like Aviva.
What I like about the shares
Aviva currently has a dividend yield of 8.6%. This is the seventh-highest out of all FTSE 100 companies.
This is a great way to build a second income.
If I were to buy 3,044 of its shares for £3.82 each, I could make £1,000 in annual passive income (keeping in mind that dividends aren’t guaranteed).
This is also likely to increase over time, with Aviva raising its dividend by 8% to 11.1p after first-half operating profit increased by the same amount. It must be noted however that the dividend cover is only 1.3 times earnings, below the ideal figure of 2.
Furthermore, Aviva has an excellent balance sheet, with £19.84bn of cash. This is almost double its market capitalisation of £10.67bn at the time of writing. It should allow Aviva to weather any storm that comes its way.
Now what?
While it’s difficult to say that Aviva is the outright best FTSE 100 stock, it’s definitely in the runnign for me. It’s a company with solid foundations that should continue to grow as the economy recovers. Aviva also provides an excellent dividend that I think would appeal to income investors.
