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I’d invest £2k in this FTSE 100 7.9% yielder inside a Stocks and Shares ISA

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The stock market doesn’t just offer you share price growth, it amplifies your returns by paying generous dividend income as well. Over the long run, this is a winning combination that can really turbocharge your wealth.

If you invest inside a Stocks and Shares ISA, you can take your returns free of tax, for life. Some people like to stick to the simplicity of a FTSE 100 tracker that follows the fortunes of the UK’s top 100 blue-chips. But I would also suggest adding individual stocks to speed up your returns, such as this household name.

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Viva Aviva

Aviva (LSE: AV) offers general insurance, protection, pensions, investments, annuities and equity release products to customers in the UK, as well as financial services in Europe, Canada and Asia. Worldwide, it has a massive 33m customers. 

The UK gives it a solid domestic base, while its overseas operations should offer diversification and faster growth opportunities.

This is a solid FTSE 100 company with a market cap of £16.17bn, but lately it has been a frustrating hold for investors. The Aviva share price has underperformed, and now trades 24% lower than it did five years ago. Over the same period, the FTSE 100 as a whole grew 9.5%.

Investors have been complaining that Aviva lacks direction and a robust strategy, while competition in the life insurance market is tough, and profit growth has been sluggish. Management is now responding by simplifying the business into five operating divisions, while selling its stake in its Hong Kong unit to joint-venture partner Hillhouse Capital.

Holding on in China

That won’t be the end of its disposals, as Aviva is looking to sell its operations in Hong Kong, Vietnam and Indonesia, although CEO Maurice Tulloch appears keen to hang on to China and Singapore, which delivered double-digit operating profit growth in 2018.

Activist investors are on Tulloch’s case, demanding a more radical break-up, so everything is up in the air right now. If you buy the stock today, you may have to sit through that uncertainty, but don’t let that be a deal-breaker, because now may actually be a good entry point.

If the overhaul pays off, this could drive the Aviva share price higher. If you wait until things are clearer, you will miss out on any recovery. Aviva’s stock is due an upwards revaluation, given that it trades at a rock bottom valuation of just 6.9 times forecast earnings, well below the FTSE 100 average of 18.06.

While you wait, you will receive one of the most generous yields around, as Aviva is forecast to yield an astonishing 7.9% next year. High dividends can sometimes be unsustainable, but the board recently restated its commitment to a progressive policy, and the payout should be nicely covered 1.8 times by earnings.

Aviva will sort itself out, I feel. If you buy at today’s cut price, you can afford to wait for the revival, while reinvesting that generous dividend to build up your share in the business.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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