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Income reserves come in all shapes and sizes. However, since dividends are not guaranteed, I think it is essential to be diligent about purchasing stocks solely for passive income.
Some characteristics I look for are a business with a solid moat, solid fundamentals and a decent track record, as well as an attractive level of profitability.
I think that Aviva (LSE: AV.) meets all my requirements. I'm a fan and here's why I would buy some shares as soon as I have some cash to invest.
Aviva shares rise
As one of the UK's largest multiline insurance companies, Aviva has defensive traits. This relates to their most common offering, car insurance, which is a legal requirement in the UK. It also offers other services, including life insurance, pensions and annuities.
Financial services stocks have been hit hard by recent volatility. Aviva shares have recovered well recently, so there is a chance it could soon become too expensive for my liking, so I am keen to act soon. A big reason for this is the better-than-expected 2023 results.
Over a 12-month period, the shares rose 12.5% from 424p last year to current levels of 477p.
the good things
Aviva's recent performance against a backdrop of volatility was very impressive. To break down the results, the company stated that costs were falling and sales were increasing. A perfect cocktail for almost any business if I ever saw one! It appears that the company's recent strategic review to reduce costs by streamlining its offering and increasing sales appears to be working.
In addition to good performance, Aviva acquires Probitas. This could represent key growth opportunities as this acquisition will mean Aviva is in the historic and prestigious Lloyd's insurance market for the first time in over two decades.
Turning to fundamentals, the dividend yield appears to be well covered and stands at 7.2%, outperforming the index. The company seems determined to reward shareholders, which is a positive for me. It recently announced a £300m share buyback plan.
Additionally, the stock is still at a level where I would consider it good value for money. They trade on a P/E ratio of 12. However, I don't think they will stay cheap for long!
Risks and final reflections.
One thing I can't help but wonder is how this new streamlined business, which focuses its efforts on fewer markets and products, will fare if volatility continues? The potential blanket of protection has been removed through diversification and broader markets.
In addition to this, the markets in which it operates are extremely competitive, something I will keep an eye on.
The last risk I'll mention is Aviva's appetite for acquisitions. When this works, it can help increase investor rewards. However, divesting failed companies can be costly and have untold damage to the bottom line and rewards for investors.
Overall, I think the positives far outweigh the negatives. A defensive business, coupled with a generous investor reward policy and excellent recent performance, make my investment case a no-brainer. I wish I had bought some stocks earlier, before the recent rally!
