After years of being overlooked, UK dividend shares are starting to look like unmissable bargains, to my eyes.
Investors have shunned the FTSE 100 as they chase high-flying US tech stocks, but that dynamic could be about to shift. With interest rates expected to fall this year and next, high-yielding dividend stocks may steadily regain their appeal.
Lately, investors have preferred the safety of cash and bonds. These have offered more attractive returns due to rising interest rates, with little or no capital risk.
However, as further UK interest rate cuts loom, the yields on these fixed-income investments may shrink, making dividend stocks more compelling.
Aviva shares have outperformed their peers lately
At the same time, the US stock market, particularly its tech-heavy Nasdaq, has surged to record highs. But as Wall Street works out what to make of shock Chinese AI entrant DeepSeek, that may change. We’ll see. Investors haven’t fully absorbed that shock yet.
But with S&P 500 valuations stretched, we could see a shift back towards unloved and undervalued UK stocks. The FTSE 100, with its rollcall of steady dividend payers, may finally get the recognition it deserves.
FTSE insurers have struggled lately, but there’s one notable exception. Insurer and asset manager Aviva (LSE: AV). Its shares have climbed 18% over the last year. Over five years, they’re up more than 30% (with dividends on top). Despite these gains, they look reasonably valued.
The Aviva share price trades at a price-to-earnings (P/E) ratio of less than 14, slightly below the FTSE 100 average of around 15. That’s not dirt cheap, but it’s pretty good for a company with a strong market position and solid financials.
It currently offers a trailing yield of 6.5%, but analysts forecast this will rise to 6.9% in 2025 and an impressive 7.4% in 2026.
Naturally, there are risks. Forecast dividend cover’s thin at just 1.4. While not dangerously low, it I’d like a bigger cushion against potential earnings fluctuations. Aviva’s financial strength reassures me. Its Solvency II shareholder cover ratio stands at a robust 195%, reflecting a strong balance sheet and capital position.
Worth considering as a long-term hold?
The company’s Q3 2024 results, published on 14 November, showed general insurance premiums surging 15% to £9.1bn. Wealth net flows also increased 21% to £7.7bn, reflecting strong demand for Aviva’s investment products.
Importantly, the company’s operating profit’s on track to hit £2bn in 2026, reinforcing its long-term growth potential.
The share price could retreat in the short term. Aviva operates in a mature and competitive market at a difficult time. Consumers are struggling and this could hit insurance premiums. Stock market volatility could punish its asset management arm.
So I wouldn’t expect wonders. Any investor considering Aviva should only buy with the aim of holding for years, and ideally decades, to give their dividends time to compound and grow.
I don’t hold Aviva and won’t buy it. That’s purely because I already have a big stake in two FTSE 100 rivals, Legal & General Group and Phoenix Group Holdings. Both have trailed Aviva badly since I bought them. I’m crossing my fingers they’ll put that right.
