Aviva (LSE: AV) shares now offer one of the highest dividend yields on the entire FTSE 100. They currently offer passive income of 7.71% a year, which should look even better if savings rates and bond yields continue to slide.
While dividend income is never guaranteed, it has one advantage over cash savings rates. It should rise over time, as companies increase their shareholder payouts as profits grow. Assuming they do, that is.
AJ Bell forecasts an average yield across the FTSE 100 of 4.2% in 2024. Yet consensus forecasts suggest Aviva will yield a thumping 8.16% in 2024.
It’s a high income stock
If I invested my full £20,000 Stocks and Shares ISA in Aviva shares I’d be on course to receive a pretty nifty income of £1,632 in the first year. I wouldn’t spend the cash, but reinvest every penny straight back into Aviva shares, to build my stake.
However, the high yield is partly explained by the underwhelming Aviva share price performance, which fell 3.43% over the last year. Ultra-high yields can be a sign of a company in trouble, although I don’t think that’s the case here.
Aviva did cut its dividend in November 2020, rebasing it around a third lower than before the pandemic. However, it’s been climbing nicely since then.
In the financial year 2021, Aviva paid 22.05p per share. In 2022, it hiked that more than 40% to 31p. For full-year 2023 it’s expected to pay 33.4p per share, up 7.7%.
The board has also been rewarding loyal investors with share buyback programmes. CEO Amanda Blanc expects to deliver “regular and sustainable” returns of surplus capital.
The shares look reasonable value to me, trading at a forward price-to-earnings ratio of 13.8 times for 2023. However, that is higher than the FTSE 100 average of around 9.9 times, so I wouldn’t call them howlingly cheap.
I’m a little over-exposed
In November, the group said it was set to beat its full-year target of increasing operating profit by between 5% on 7%, despite a jump in weather-related claims triggered by Storms Babet and Ciaran.
Aviva is a widely diversified company, which brings advantages, but like many insurers it is also on the frontline of climate change, which could squeeze profits. The world seems to go from one hurricane to another these days.
It took a hit at the end of November when Deutsche Bank upgraded rivals Direct Line Group, Legal & General Group, and M&G from ‘hold’ to ‘buy’, while downgrading Aviva. Deutsche warned of “small earnings headwinds and questions around excess capital return”.
Aviva is a much improved operation, thanks to de Blanc streamlining the business and tightening its focus. It’s worth buying for the yield alone, but I’m not expecting the share price to suddenly go gangbusters. This seems to be a steady state business. That’s fine by me. A bigger problem is that I already hold rival financials in L&G and M&G, and don’t want to be over-exposed to this sector.
I might invest, say, £3k or £5k in Aviva shares, but I wouldn’t invest my full ISA allowance, despite that meaty income. It’s always wise to spread the risk around.
