Another volatile week for the FTSE 100 saw the index lose a further 3%, as Covid-19 spread to most areas of the world.
Worried investors are selling their riskiest assets and moving their money into safe havens. Gold is the biggest beneficiary, up nearly 7% since the beginning of February.
Gold has always been seen as a safe bet, but its one huge flaw is that it doesn’t pay its holders any interest whatsoever. Shares are completely different. One positive from the stock price fall is that it has increased dividend yields to unusually high levels.
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Juicy dividend yields
Comparing these yields to other investments, like gold or buy-to-let too, provides a clear winner. While current buy-to-let yields come in at a couple of percent, the average dividend yield of stocks on the FTSE 100, now stands at around 4.5%. A third of its constituents now have a yield of at least 5%, whilst a quarter boast 6%+ payouts.
The high dividend yields are concentrated in a few industries in particular. The five banking stocks on the FTSE 100 now provide an average yield of just under 7%. These are huge global banks, including the likes of Barclays, Lloyds and HSBC.
Likewise, the seven mining companies, comprising the likes of Glencore, BHP and Evraz, offer an average yield of 10%. Tobacco stocks, whose products should be resilient by their very nature, also provide attractive yields, averaging over 9%.
While some of these hefty yields may be cut over the next year, many will remain intact, especially those companies that have strong balance sheets. And since it’s still more probable that the virus will be a short-term problem, it’s likely that those dividends that are cut, will be restored sooner rather than later.
Of course, investing at this point in time comes with an element of risk. But this risk is mitigated by these high dividend yields and also by the current low valuations.
What I’m buying
As for myself, I’m going to use this opportunity to buy into an excellent company that comes with a 9% dividend and is at a very attractive price point. That company is Aviva (LSE: AV).
The company is active in the life insurance, general insurance, and retirements, savings and investment markets. It’s currently valued at just five times last year’s earnings. What’s more, Aviva is priced at a 28% discount to its net asset value. For a company that can generate a return of 14% on its net assets (or equity), that seems to me to be unbelievably good value.
In fact, the shares are the cheapest they’ve been since 2013. But I’m not just buying these shares because they’re cheap. Aviva has a solid track record of growing revenues and profits. Earnings per share have almost tripled since 2015, while revenue growth has average 9% annually for the last four years.
The group’s latest results showed that it continued to grow customer numbers and improve customer satisfaction, all while expanding its footprint into the huge Asian market. Its profit growth was underpinned by a strong performance in general insurance, where operating profits rose by 20%.
And Aviva benefits from having a very strong balance sheet. It has £19bn in cash reserves, which should come in very handy in the current climate.
