Should I buy Aviva shares for a 7.4% dividend yield?

The prospect of sitting back and hopefully getting an annual dividend from a FTSE 100 shows appeal to me. Dividends are never guaranteed. So when I look at stocks with attractive dividend yields, I also pay close attention to the underlying business. The insurer Aviva (LSE: AV) yielded 7.4%, which certainly caught my eye. But how attractive are Aviva shares to long-term buy-and-hold investors like me?

The case for long-term investment

Over the past few years, Aviva has scaled back its operations to focus on its core markets. In the long run, that can make the business more profitable because it uses resources that have a strong chance of success.

Aviva’s business area is interesting to me as a future-minded investor. Its roots go back hundreds of years, underscoring the fact that demand for insurance tends to be resilient. I expect the size of the insurance market to remain large in the long term.

Last year, operating profit at Aviva rose by 35%, to £2.2bn. But using IFRS accounting standards, the company reported a loss of £1.1bn. Insurance company accounts can be a difficult thing to understand, because profits come in the short term, but liability is often applied through a long-term perspective. I profit at an impressive operating level. I think Aviva’s more focused business, strong brand and long underwriting experience will help it to be successful in the future.

The annual dividend increased by 40% to 31p per share in the latest annual results. With Aviva shares currently selling for around £4.20 each, that seems attractive to me. Indeed, it aims to deliver what it describes as “attractive and sustainable dividend“.

Payment is never guaranteed, however. The last payment for 2019 was cancelled, for example. But if the insurance company can maintain its dividend at current levels, I like the income prospects of owning the stock. If I produce an annual dividend of 7.4% and the stock stays at the same price, I would expect my money to double in ten years.

Should I buy it?

I looked at Aviva shares a few months ago and decided I would wait to see what happens with the dividend before adding it to my portfolio.

There is risk with insurance stocks (although risk management is a business). Inflation can increase the cost of settling claims. Indeed, it is one of the reasons for competition Direct Line paid dividends earlier this year.

But the recent big dividend increase means I now think Aviva is offering me a stake in a good business at an attractive price – with strong earnings prospects. If I had money to invest today, I would add stocks to my portfolio.