If I’d invested £1,000 in Aviva shares a year ago, here’s what I’d have now

Aviva shares have surged along with their peers on expectations that interest rates will fall. Dr James Fox takes a closer look at the stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aviva (LSE:AV) shares are popular with dividend investors. The insurance company has a strong dividend yield — 7.2% — and payments are supported by strong cash flows.

However, if I’d invested in Aviva shares a year ago, I’d be down 2.4%. That’s despite the company surging over the past three months.

So, a £1,000 investment would be worth £976 today. Thankfully I’d have received something in the region of £70 in the form of dividend payments.

Should you invest £1,000 in Babcock right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Babcock made the list?

See the 6 stocks

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

What’s been going on?

After peaking in early 2023, the Aviva share price pushed down over the months to September. Aviva’s results during the period were positive but not exceptional.

One reason the stock fell was the fallout from the Silicon Valley Bank crash — which resulted in a major slump in the share price. The crash highlighted to many investors that financial institutions were sitting on billions of dollars of unrealised losses in the form of low coupon bonds.

However, the reality is most financial institutions — the well-managed ones at least — don’t need to sell these bonds. So, they remain unrealised losses.

Nonetheless, this event, and the continued upward movement of interest rates put further downward pressure on Aviva.

There are several ways interest rates impact share prices. The simplest is that when interest rates are rising, and capital moves away from shares and to debt and cash.

So, as expectations of interest rates cuts have risen, capital has started moving back from debt and cash to shares.

A safe dividend?

Insurers often maintain safe dividends due to their prudent financial management and risk assessment practices.

Insurance companies focus on long-term stability and must have sufficient reserves to cover potential policyholder claims.

It’s also the case that insurance companies have strong cash flows. After all, we tend to pay our insurance companies monthly for their cover.

By comparison, drugs companies may have to wait years for a new drug to go on sale.

However, this year it does appear that the coverage ratio isn’t too strong — around one. Dividend payments are likely to amount to around 31p, while analysts believe earnings per share will amount to 31.29p.

Nonetheless, earnings are expected to increase to 48.29p over the next two years. I’d still say these dividends are relatively safe.

Better value elsewhere

Aviva is currently trading 12% below its share price target. That’s not a bad sign, but I believe there is better value elsewhere on the FTSE 100 and within insurance. Aviva is currently facing several earnings headwinds in the near term, hence the lower dividend coverage ratio.

Nonetheless, earnings per share should pick up over the coming 24 months, and the industry is still benefitting from positive trends in the form of bulk purchase annuity, among other things.

But my preference is for Legal & General. The sector peer has a stronger dividend yield at 8.3%, a strong dividend coverage ratio, around two times, and is the market leader in bulk purchase annuity.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

James Fox has positions in Legal & General Group Plc. 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.

More on Investing Articles

Investing Articles

Just released: our 3 top small-cap stocks to consider buying in April [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »