Aviva disappoints, another big dividend yield bites the dust

Aviva reported to the market this morning numbers that probably came as a bit of a shock.

Shares in Aviva crashed 15pc in early trading on Thursday after the insurer revealed a 44pc cut in its final dividend from 16p to 9p, reducing its total dividend from 26p last year to 19p for 2102 – a drop of 27pc.

Aviva said it had rebased the dividend to give certainty to shareholders and reduce debt, putting the insurer in "a sound position for the future".

Pension funds, fund managers and small investors, who have held the company's shares because of its 7pc dividend yield, were expected to offload the shares on Thursday.

RSA Insurance upset investors last month by lowering its dividend by 33pc. The surprise cut resulted in a 14pc drop in the insurer’s share price in a single day.  

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/insurance/9914400/Aviva-shares-tumble-as-slashes-dividend.html

Like RSA Insurance, Aviva had been sitting on the attraction for investors of a big dividend yield for some time, but there was always talk of underlying problems, a "value trap" in the making and thus today's reduction in the dividend shouldn't really come as a total surprise. Anyone who shifted their funds out of RSA into Aviva a few weeks ago will have been hit hard by this double whammy.


The lesson here is to be weary of companies with high dividend yields that perhaps look too good to be true. We live in a time of low IR's for cash on deposit in the bank and that is unlikely to change for some time as it looks like the Western financial system has essentially turned Japanese, low IR's designed to help the bankers out of the money inflation mess of their own making.

For investors this poses the problem of how to get a real return on your money because the IR's for cash savings will always be below the official rate of price inflation and further money/credit creation will eat away those savings over time. It's a mugs game, which requires us to go looking for a higher return elsewhere, which in the last few years shares have offered. However, if you want safety for your savings, especially against the price inflation that is an inherent part of money creation, it is increasingly difficult to find it

Dividend yields have been going up in recent years, although as share prices have also been on a bull run, yields have struggled to keep pace. However, in an financial system where the banks are paying you for the most part under 2% after tax on your cash, with price inflation persistently above that as Central Banks choose to ignore it, a 6%+ dividend yield on any share is an attractive option. The trouble is if the company is under pressure itself the temptation will be to reduce the dividend at some stage and bring it back more in line with market averages. Aviva's dividend is still a lot better than what you could get on deposit, but the ride in the share price and the potential downside to your capital is a constant fear that investors have to live with on any share.

So who's next? There has been some talk that Vodafone may well struggle to hold its dividend at over 6% and despite euphoria over possible merger/takeover talks with Verizon Wireless pumping up the share price yesterday, one would have thought that the company must be under some pressure to rethink its relatively high dividend paying policy, especially as recent results suggest that some of its markets are under pressure.