Earlier this week, Aviva announced that it intends to pay out 31p in dividends per share in 2022 and 32.5p in 2023. But Aviva’s common equity isn’t the dividend stock I’d buy right now.
If I were looking to give my passive income a boost, I’d be looking at buying the company’s preferred stock, which is known as AVIVA 8 3/8% PF 8 3/8% CUM IRRD PRF #1 (LSE:AV.B).
I think that preferred stock would be a better investment for me than the common shares if I were looking to boost my passive income. The reason for this is mostly to do with managing risk.
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Preferred stock dividends
Aviva’s preferred stock pays a fixed dividend of 8.375p per share each year. So in order to receive £100 in passive income, I’d need 1.194 shares.
At today’s prices, that would mean an investment of £1,368. But for a stock with a dividend yield of just over 7%, I think it’s an attractive proposition.
A high dividend yield can sometimes be an indication that investors are expecting the dividend payments to be cut. But I think that this risk is somewhat limited in the case of Aviva’s preferred stock.
Two features of the preferred stock limit the risk of a dividend cut. The first is that the preferred stock dividends have to be paid before any dividends are paid to common stockholders.
Nonetheless, there is still a risk that Aviva might decide to cut its dividend. But if this happens, then the missed payments for the preferred dividends accumulate and have to be paid in full before common equity dividends can be reinstated.
Reinvesting
I intend to reinvest the dividends that I receive from this investment. This means that I think I can do well whether the share price goes up or down.
If the price goes down, then I’ll be able to reinvest my dividends at a higher rate of return. Since the dividend is fixed, a lower share price will mean a higher dividend yield.
On the other hand, if the share price goes up, then the return I’ll get by reinvesting will go down. But in that situation, I’ll be able to realise a profit on my investment by selling part of it.
Of course, if the share price stays the same, then I’ll continue to reinvest my dividends at a 7% return. As a result, I think that I can do well with Aviva’ s preferred stock whatever happens to the share price.
A stock to buy
I think that Aviva preferred shares are a great dividend stock for an investor like me. That’s why I already own them in my portfolio.
In order to keep my investments balanced and diversified, it will probably be some time until I get to owning 1,194 shares. But if I were looking to give my passive income a boost, I’d buy the stock today.
