One magnificent UK stock I’d buy today and it’s not Tesco or HSBC 

I’ve zoned in on a top UK stock from the FTSE 100 that offers higher income and growth prospects than some high-profile rivals.

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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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Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Created with Highcharts 11.4.3Aviva Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Tesco Plc. 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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