Income stocks come in all shapes and sizes. However, as dividends aren’t guaranteed, I reckon it’s crucial to be diligent when buying stocks purely for passive income.
Some characteristics I look for are a business with a strong moat, solid fundamentals, and a decent track record, as well as an attractive level of return.
I reckon Aviva (LSE: AV.) ticks all my boxes. I’m a fan, and here’s why I’d look to buy some shares as soon as I have some investable cash.
Aviva shares on the up
As one of the largest multi-line insurance firms in the UK, Aviva has defensive traits. This is linked to its most prevalent offering, car insurance, which is a legal requirement in the UK. It also offers other services too, including life insurance, and pension and annuities.
Financial services stocks have been hit hard by recent volatility. Aviva shares have rallied well recently, so there is a chance the shares may soon be too expensive for my liking, hence why I’m keen to act soon. A big reason for this is better-than-expected 2023 results.
Over a 12-month period, the shares are up 12.5% from 424p at this time last year, to current levels of 477p.
The good stuff
Aviva’s recent performance against the backdrop of volatility was very impressive. To break the results down, the business stated that costs were falling, and sales were rising. A perfect cocktail for pretty much any business if ever I saw one! It looks like the firm’s recent strategic review to cut costs through streamlining its offering, and boosts sales, seems to be working.
In addition to strong performance, Aviva is acquiring Probitas. This could represent key growth opportunities, as this acquisition will mean Aviva is in the historic and prestigious Lloyd’s insurance market for the first time in over two decades.
Moving on to fundamentals, the dividend yield looks well covered, and stands at an index-beating 7.2%. The business looks intent on rewarding shareholders, which is positive for me. It recently announced a share buyback scheme worth £300m.
Furthermore, the shares are still at a level where I’d consider them value for money. They trade on a price-to-earnings ratio of 12. I don’t think that they will stay cheap for too long though!
Risks and final thoughts
One thing I can’t help but wonder is how this new streamlined business, focusing its efforts on fewer markets and products, may fare if volatility continues? The potential blanket of protection through diversification and wider markets has been taken away.
In addition to this, the markets it does operate in are supremely competitive, which is something I’ll keep an eye on.
The final risk I’ll mention is Aviva’s appetite for acquisitions. When these work out they can help boost investor rewards. However, disposing of failed businesses can be costly and have untold damage to a balance sheet, and investor rewards.
Overall, I reckon the positives outweigh the negatives by some distance. A defensive business, coupled with a generous investor rewards policy, and excellent recent performance, make my investment case a no-brainer. I just wished I’d bought some shares sooner, before the recent rally!
