Just one week ago, traders and investors were panicking that global stock markets might fall off a cliff. Not only have these fears failed to transpire (at least for now), the FTSE 100 index of shares has actually clawed back all of its earlier losses.
Bargain hunters shouldn’t be deterred by this healthy rebound, however. Years of underperformance mean the Footsie remains packed with excellent value stocks to buy.
So which would I buy if I had spare cash to invest? Here’s one of my favourites. Broker forecasts suggest it could be an cheap way to make a huge passive income for the next few years at least.
Should you invest £1,000 in Smith & Nephew Plc right now?
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A bargain stock
Aviva‘s (LSE:AV.) share price carries an enormous 7.3% dividend yield for 2024. This makes it one of the biggest potential dividend payers on the FTSE 100 today.
The company also offers excellent value when it comes to predicted earnings. City analysts think earnings here will soar 21% this year, leaving it on a price-to-earnings growth (PEG) ratio of 0.5.
Any sub-1 reading implies that a stock is undervalued.
There’s plenty to like about Aviva. Indeed, I own its shares in my Individual Savings Account (ISA) and my Self-Invested Personal Pension (SIPP).
I like its excellent brand power and robust position in fast-growing markets. Demand for retirement, wealth and insurance products is rising strongly as populations age in its UK, Irish and Canadian regions.
I’m also a huge fan of Aviva’s exceptional cash generation. This gives it cash for organic investment, acquisitions, dividends and share buybacks. It’s Solvency II capital ratio is consistently above 200%.
Risks
But like any share, it isn’t without risk. Profits here vulnerable to dropping when consumer spending falls in tough economic periods.
The business — which also has a considerable general insurance division — is also exposed to rising claim costs due to climate change.
The Association of British Insurers (ABI) says that storms and heavy rainfall pushed property insurance claims to £1.4bn between April and June. This was the highest figure since records began (albeit not long ago, in 2017). It’s unlikely to remain the all-time high, however, as extreme weather events before more common.
That dividend yield
But on balance, I think the potential benefits of owning Aviva shares outweigh the risks. I think it could be an especially good way to make a large second income.
| Year | Predicted dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2024 | 35.40p | 6% | 7.3% |
| 2025 | 38.08p | 8% | 7.9% |
| 2026 | 40.80p | 7% | 8.4% |
As we can see, City analysts expect dividends to keep rising over the next few years at least. This pushes the dividend yield as high as 8.4%, more than twice the Footsie average of 3.5%.
I think that dividends will rise strongly over the long term too, underpinned by the firm’s accelerating investment in capital-light businesses to exploit its growing markets.
At 434p, I think the Aviva’s share price is too low for me to ignore when I have the money.
