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Just a week ago, traders and investors were panicking over the possibility of global stock markets falling off a cliff. Not only have these fears not materialized (at least for now), but FTSE 100 Index The stock market index has in fact recovered all of its previous losses.
Bargain hunters should not be put off by this healthy rally, however. Years of underperformance mean the Footsie remains packed with excellent value stocks to buy.
Which would you buy if you had extra money to invest? This is one of my favourites. Broker forecasts suggest it could be a cheap way to generate a huge passive income for the next few years, at least.
A bargain stock
AvivaThe (LSE:AV.) share price carries a massive 7.3% dividend yield by 2024. This makes it one of the largest potential dividend payers in the FTSE 100 today.
The company also offers excellent value for money when it comes to forecast earnings. City analysts believe earnings here will rise 21% this year, leaving it at a price-to-earnings (PEG) ratio of 0.5.
Any reading below 1 implies that a stock is undervalued.
There are many things I like about Aviva. In fact, I have shares in it in my ISA. and My Self Invested Personal Pension (SIPP).
I like its excellent brand power and strong position in fast-growing markets. Demand for retirement, wealth and insurance products is increasing significantly as the population ages in its UK, Ireland and Canada regions.
I am also a big fan of Aviva’s exceptional cash generation, which allows it to have cash available for organic investments, acquisitions, dividends and share buybacks. Its Solvency II capital ratio remains consistently above 200%.
Risks
But, like any stock, it is not without risk. Earnings here are vulnerable to falling when consumer spending falls in tough economic periods.
The company, which also has a significant general insurance division, is also exposed to rising claims costs due to climate change.
The Association of British Insurers (ABI) says storms and heavy rain pushed property insurance claims up to £1.4bn between April and June. This was the highest figure since records began (albeit not so long ago, in 2017). However, it is unlikely to remain the all-time high as extreme weather events become more common.
That dividend yield
But overall, I think the potential benefits of owning Aviva shares outweigh the risks. I think it could be a particularly good way to generate a significant second income.
| Year | Expected dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2024 | 35.40p | 6% | 7.3% |
| 2025 | 38.08p | 8% | 7.9% |
| 2026 | 40.80p | 7% | 8.4% |
As we can see, City analysts expect dividends to continue to rise for at least the next few years, pushing the dividend yield up to 8.4%, more than double the Footsie average of 3.5%.
I believe dividends will also grow strongly over the long term, supported by the company's accelerated investment in capital-light businesses to exploit its growing markets.
At 434p, I think the Aviva share price is too low to ignore when I have the money.
