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Why I’d consider shares of Aviva and Lloyds to lock in hefty dividend streams now

Tezcan Gecgil, PhD
Hedge shaped as the pound symbol inside a glass piggy bank

Seasoned investors regard share purchases as buying pieces of real businesses. They appreciate that investing in a quality company that also pays a respectable dividend could be a game-changer for most retirement portfolios.

Today I’m looking at two high-yield dividend stocks. At the time of writing, the average dividend yield of the two is 6.4%. In other words, if I buy them evenly in a £5,000 account, I’ll create an annual income stream of £320.

And that would be on top of any share appreciation I’d get.

Insuring a dividend portfolio

On 6 June, shareholders in Aviva (LSE: AV) cheered the future direction set out by new CEO Maurice Tulloch. The multinational insurance giant will now be divided into two parts, general insurance and life insurance. Management believes that the split will bring “stronger accountability and greater management focus”

Furthermore, Tulloch will be trimming down the business and cutting overheads by £300m a year with as part of an aim to achieve greater efficiency and higher profitability.

Analysts also welcomed the commitment to “a progressive dividend policy”. Its dividend yield stands at 7.2%. The next interim dividend payment date is 29 September.

There are various metrics that analysts use to value insurers. Aviva’s trailing P/E ratio stands at 11, which compares well with the average P/E multiple of the general insurance industry in Europe. The group’s price-to-book (P/B) ratio of 0.88 also appeals to value investors, with a number under 1.0 indicating a potentially undervalued stock.

Aviva is a large, diversified, and highly-rated global insurer. The latest announcement by management provides a realistic roadmap for how the group will drive growth and cash generation in its core markets. 

Over the past year, its shares have suffered from a lack of managerial direction.  Organisational change takes time and we still have the uncertainty over Brexit. Yet, the long-term investment thesis is attractive considering the share price, dividend yield, and valuation.

Bankable dividends

With a robust dividend yield of 5.6%, Lloyds Banking Group (LSE: LLOY) is next on my list. 

It was one of the UK banks most affected by the global financial crisis of 2008-09. Since then, its fundamentals have clearly been on the mend and the bank is profitable. For example, the cost-to-income ratio is a healthy 44.7%. This metric shows a bank’s efficiency – the lower the ratio, the more profitable the business is and Lloyds has one of the lowest ratios of any UK peer.

Over the past few years, in addition to its mortgage business, management has been growing the higher-margin non-mortgage loan book, including auto finance, credit card lending, and commercial lending to small and mid-cap enterprises (SMEs). Through diversifying the loan mix, the firm has increased total income as well as net interest margin (NIM).

The group can be regarded as a stock market proxy for developments in the UK. Yet despite the continuing Brexit conundrum and a slowing domestic economy, returns have remained resilient. Year-to-date the shares are up over 10%. 

In 2018, Lloyds paid a total ordinary dividend of 3.21p per share. From Q1 2020, the payments will become quarterly as opposed to twice a year. The next interim dividend payment date is 25 September.

Last year, the group also announced a share repurchase programme of £1.75bn. Thus Lloyds rewards long-term investors with generous cash distributions.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Motley Fool UK 2019