7.4% yield! Now the Aviva share price is climbing too, should I buy it?

If the Aviva share prices takes off I could get a fabulous total return once dividends are included. I’m finding it hard to resist.

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Image source: Aviva plc

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After going nowhere for ages, the Aviva (LSE:AV) share price is finally showing signs of life. Nothing spectacular, it hasn’t suddenly turned into Nvidia, but then nobody should expect a FTSE 100 insurer to shoot the lights out. That’s not why investors buy them.

Aviva’s shares are up 10.78% in the last three months, which isn’t going to make anybody a millionaire on its own. Yet I think this is a sign of a brighter outlook for 2024 and beyond.

The pandemic was tough on Aviva, which scrapped its final dividend in April 2020 following a request from regulators as capital markets went haywire. Its shares tanked (it was hardly alone in that) and 2022 was another toughie, as interest rates soared and stock markets struggled.

Brighter days

I’m currently loading up my self-invested personal pension (SIPP). I reckon markets will get their mojo back as expectations of the first rate cut grow. Once savings rates and bond yields fall, the income paid by blue-chip dividend stocks will look even more attractive than it does today. 

Currently, Aviva yields 7.37%. Markets expect that to hit 7.87% in the current financial year, and climb again to 8.37% in 2024. No dividend is guaranteed, of course, and the 2023 payout is only covered 1.1 times by earnings.

However, on 16 November CEO Amanda Blanc declared herself “extremely confident that Aviva will continue to deliver more for shareholders”. In practice, that means a total dividend of 33.4p for 2023, up 7.7% from last year’s 31p, at a total cost of £915m. Shareholder payouts are set for “low-to-mid single-digit growth” thereafter.

Nothing is ever 100% certain but I find that forecast comforting. Even modest share price growth on top of that should deliver an excellent total return. 

I already have exposure

Like every company, Aviva is at the mercy of events. Climate change is a concern, with the company spending more on claims following storms Babet and Ciarán. Falling interest rates could hit annuity sales, although they might also boost equity release sales. The NHS’s seemingly intractable problems have done wonders for sales of private medical insurance.

Buying Aviva shares won’t make me rich overnight, but that’s not my strategy when investing. I like to buy solid companies with steadily rising revenues and a loyal customer base, so my returns compound over time.

I much prefer to buy shares when they’re cheap. And despite its recent recovery, the Aviva share price is still 5.8% lower than a year ago. It trades at a modest valuation of 14.6 times earnings.

I can see plenty of scope for a share price recovery but one thing is holding me back. I’ve already pumped a lot of money into rival FTSE 100 insurer Legal & General Group, which is way cheaper, trading at 5.9 times earnings and yielding more at 8.44%.

I’m wary of getting overexposed to the financials sector, as I also hold wealth manager M&G, and that’s the only thing holding me back from buying Aviva shares today. I might still have a nibble though, as they look too tempting.

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.

Harvey Jones has positions in Legal & General Group Plc and M&g Plc. The Motley Fool UK has recommended M&g 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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