7.6% dividend yield from FTSE 100 stalwart! Too good to be true?

At FTSE 100 certainly offers investors some good dividend yield. The index is loaded with established companies that often trade at a discount relative to their American peers. So, as a value investor with a preference for dividend-paying stocks, the index is a good place for me to invest.

Today, I saw it Aviva (LSE: AV.), which offers investors a dividend yield of 7.6%. It was one of the biggest gainers in the index, and fell 10% in the month following the failure of Silicon Valley Bank.

But we know, sometimes it is wise not to trust stocks with large dividend yields. So is Aviva a good buy or is this a stock to avoid? Let’s take a closer look.

Give up hope

On March 9, Aviva posted a better-than-expected 35% annual operating profit and announced a £300m share buyback. Profit for the year to December 31 came in at £2.2bn against the company’s consensus estimate of £1.75bn. This sharp increase is driven by the rise in life and public policy sales. The total dividend for the year was set at 31p a share, in line with expectations.

Following the announcement, share prices rose before tanking as fears swept across the financial sector following the collapse of SVB.

Low P/E

Like many UK-listed financial stocks, Aviva trades at a low price-to-earnings ratio of around 6.5. That’s about half of the index average.

But there are several reasons for this. For one, Aviva does not offer long-term share price growth. Over five years, the stock is down 15%. Although, if I had bought it during the first lock – three years ago – I would be up 57% today.

There’s also the fact that high-yielding stocks often don’t offer much in the way of share price growth, as they tend to reward shareholders through dividends through share buybacks. Although, it should be noted that Aviva recently launched a £300m share buyback programme.

In underlining the above point, the total return of the average FTSE 100 stock is around 8% or 9%. But in Aviva’s case, shareholders will receive a 7.5% dividend, plus or minus share price growth.

Should I buy Aviva shares?

Personally, I like to invest in relatively stable, even boring, stocks with strong dividend yields.

Going forward, Aviva warned that customers should brace for further increases in cover charges after a second increase in 2022 as the company faces rising costs for repair bills. And it can be a challenge if customers start looking elsewhere for better deals.

But, the problem is, other insurers are in the same boat, so there is no option for existing customers. But in my opinion, I’d rather see Aviva stay ahead of rising premiums. After all, we saw what happened Direct Line – be surprised when premiums increase in 2022.

Would I buy Aviva? Well, I already have the stock, but I want to buy more on the dip now. I think it is undervalued at around 400p.