Should I buy Aviva shares for their 7% yield?

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The potential income I can earn from company dividends is one of the main reasons I invest. At the moment, quite a lot of blue-chip FTSE 100 members have yields I find attractive. For example, insurer Aviva (LSE: AV) has a yield of over 7%. Is that enough reason for me to buy some Aviva shares for my portfolio?

Falling share price

Although the dividend may look good, the Aviva share price performance has been poor lately. Over the past year, for example, it has tumbled 24%.

That reflects a number of concerns. A worsening economy could hurt profits at financial services providers like Aviva. The business has been slimming down, which is good for its balance sheet but might limit future earnings potential. It also makes Aviva more reliant than before on a few key markets, so if demand in the UK weakens, for example, that could eat heavily into profits.

Still, the share price fall suggests that investor enthusiasm for the insurer has cooled considerably. Could that make it a good time for me to add the shares to my portfolio?

The bull case for Aviva shares

Aviva is a large insurer with a long history and big customer base. It is definitely not the most exciting growth play I could own in my portfolio. But I like the durability of its business and the current dividend yield. I expect demand for insurance to remain high no matter what happens in the wider economy. With its famous brands, Aviva can benefit from that.

The company struck a bullish note about the outlook when delivering its interim results, pointing to expected growth in key business areas as well as the cost benefits of an efficiency drive. Admittedly, basic earnings per share were negative and fell significantly compared to the same period last year when they were also in the red. But, as with all insurers, a single set of accounts does not do full justice to the company’s business performance, due to the number of exceptional items that pop up in the industry. I think the momentum in the business is positive.

An interim dividend increase of 40% suggests management feels upbeat. It has told investors it is aiming for a full-year dividend of 31p per share, meaning the prospective yield is around 7.3%. The Aviva dividend was cut in 2020, but if management delivers on its current plan, this year’s dividend will be slightly larger than it was before the pandemic.

My move

With a solid but unexciting business, positive commercial outlook, and appealing dividend yield, the falling Aviva share price has made it look more attractive to me than before.

For that reason, I would now consider buying it for my portfolio. I would do so primarily because of the income opportunity I see here. If the business performs well, the share price may recover with time, but in the short term, I expect it could yet fall further. Clearly a lot of investors currently do not feel positive about the firm, which is why Aviva shares have been sliding. As a buy-and-hold investor considering a stake in what I see as a quality business, such a prospect does not bother me. I would be happy to buy today — and wait.

The post Should I buy Aviva shares for their 7% yield? appeared first on The Motley Fool UK.

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C Ruane 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.