I’m ready to add another top UK stock to my portfolio, and I’m going to choose it by process of elimination.
I want a company with a low valuation and high yield, that’s been overlooked by the market but has a strong underlying business. I’ve been tempted by Asia-focused bank HSBC Holdings for some time, but it doesn’t quite fit my criteria.
Not quite cheap enough
Its valuation looks reasonable, trading at 9.96 times earnings, but it’s not as cheap as some. The shares offer a decent yield at 4.36%, but there are higher yields out there. Also, its stock has climbed 16.38% in the last year. I fancy something that’s fallen, to give me a lower entry point and higher bouncebackability, for want of a better word.
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Grocery giant Tesco is a bit more expensive at 12.02 times earnings, while its yield is solid but unspectacular at 4.14%. Over 12 months it is up just 3.81%. Like HSBC, I’d happily buy it, but I can’t afford everything out there, so have to make choices.
Which brings me to the stock I do plan to buy. Insurer Aviva (LSE: AV) meets my criteria with flying colours. It currently offers one of the 10 highest dividend yields on the FTSE 100 at 7.75%. That’s a colossal rate of income.
Yet it’s cheaper than both HSBC and Tesco, with a forward price/earnings valuation of just 7.54% for 2023. As if that wasn’t enough, Aviva’s share price has done badly too. It is down 7.98% over the last year, and 21.46% over five.
Aviva’s falling share price attracts me for two reasons. First, I hate buying stocks on the back of a strong run, as I usually arrive right at the end of it.
Second, Aviva hasn’t simply delivered half a decade of share price misery. It’s had its share of spikes and dips, and someone who bought it three years ago would be up 77.63%. I hope to buy on one of the dips, although these things are impossible to gauge with any certainty.
Several downsides to note
Buying any stock carries risks. Aviva may be cheap but it could also be a value trap, and its share price may never bounce back. Dividends can be cut at any time, and high yielders are particularly fragile. Aviva’s has bobbed around a bit, paying 35.53p per share in 2021, followed by a dip to 16.76p in 2022, then a rebound to 31p in 2023.
While Aviva’s insurance premiums rose in Q1, its investment division has been hit by the stock market volatility of the last 18 months. With everything from sticky inflation to the US debt ceiling weighing on its shares today, investors’ inflows may take time to return.
If I buy today but the recovery takes time, that’s fine. My reinvested dividends will pick up more stock at today’s lower price, turbocharging my stake when the recovery finally does come, as history shows always happens at some point.
HSBC and Tesco are on my watchlist as I look to populate my recent SIPP transfer with FTSE 100 dividend stocks. But Aviva looks like my next buy.
