Why Lloyds and Aviva could offer long-term income investing appeal

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Why Lloyds and Aviva could offer long-term income investing appeal

The FTSE 100 index’s dividend yield currently stands at a relatively modest 3.4%. However, several of its members offer significantly higher yields that could make them attractive to income-seeking investors.

Among them are insurance company Aviva (LON: AV) and banking stock Lloyds (LON: LLOY). While both firms currently face an uncertain near-term outlook, their income investing potential, low valuations and improving recent financial performance could make them relatively appealing long-term holdings.

Aviva

Aviva’s share price has risen by 11% in the past year versus a gain of 9% for the FTSE 100. However, the company continues to trade on what appears to be an attractive valuation. Its price-to-earnings ratio of 8.8 suggests it offers a wide margin of safety compared to many large-cap shares.

Of course, the firm continues to press ahead with significant changes to its business model. It has made numerous disposals and exited a variety of countries as it seeks to focus on regions and business lines in which it feels it has a competitive advantage. This could lead to an improving long-term profit growth rate.

The proceeds from asset disposals are being used to reduce debt and reward shareholders. Indeed, Aviva plans to return 101.69p per share to holders of its shares as at 13 May via a one-for-one ‘B’ share scheme. Such shares will be redeemed and cancelled shortly afterwards. In tandem, it will consolidate shares on a 76 for 100 basis to offset the effect of a reduction in net asset value on its share price.

In terms of income potential, Aviva’s share price has a forward dividend yield of 7.2%. It plans to raise dividends at a low-to-mid single-digit rate over the coming years. Although this may prove to be a lower rate than inflation, should it persist at current high levels, the company’s growth plans and improving financial position, alongside its generous yield, could make it a worthwhile income stock for the long run.

Lloyds

The Lloyds share price has experienced a relatively disappointing performance over the past year. It is up by just 2%, which means it has lagged the FTSE 100 by around 7%. Investors appear to be somewhat concerned about the prospects for the wider banking sector amid an uncertain period for the economy.

However, the bank’s valuation suggests it offers a wide margin of safety. It trades at a discount to tangible net assets per share of 19%, while further rises in interest rates could lead to higher profitability as its net interest margin widens.

Meanwhile, the company recently announced a revised growth strategy and a refreshed structure. This could lead to an improving financial performance through investment in areas such as digital services and cross-selling a wider range of products to existing customers.

With a dividend yield of 4.4%, Lloyds offers a substantially higher income return than the FTSE 100 index. Although its share price could prove to be volatile in the near term due to an uncertain economic outlook, a rising interest rate and the implementation of its revised strategy could make it a relatively attractive long-term income option.


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