Dividend stocks are prized for the income they provide, but these two have delivered some impressive share-price growth over the last few years as well.
That’s good news for me because I’ve owned both for several years. When I first bought them, their dividend yields were close to 10%. Today, the yields are closer to 6%, largely because their share prices have risen so much.
That’s left me with an interesting question. After such strong performances, do these two FTSE 100 dividend stocks still offer good value today — and which one looks the more attractive opportunity?
Two very different growth stories
At first glance, there isn’t much that links Aviva (LSE: AV.) and Aberdeen (LSE: ABDN). Aviva is a diversified insurer and financial services group, while Aberdeen is an asset manager with more than £500bn of such assets. But appearances can be deceptive.
Five years ago, Aviva was viewed as a boring dividend stock that had lost its way, while Aberdeen was struggling with persistent outflows. Yet both have confounded the market and delivered strong growth in their own ways.
Aviva shed assets, became leaner and more profitable, then used its stronger balance sheet to grow through a series of acquisitions, including Direct Line. Aberdeen, on the other hand, spotted an opportunity in the direct-to-consumer market and pounced on interactive investor, which has since become a major growth engine for the group.
The valuation dilemma
This is where things get interesting.
On the face of it, Aviva looks expensive. I calculate a forward dividend yield of around 6.2%, with the shares trading on roughly 39 times trailing 12 month earnings. Aberdeen, meanwhile, offers a similar yield but trades on just 11 times earnings.
That would seem to make Aberdeen the obvious value pick. But there’s a catch.
Aviva’s dividend is covered around 1.3 times by earnings and is still growing. Aberdeen’s is covered by just 0.8 times, and management has indicated that it doesn’t expect to increase the payout until dividend cover improves.
So investors aren’t simply choosing between two shares offering roughly 6% income. They’re choosing between paying a much higher valuation for a growing dividend, or paying a much lower valuation for a dividend that’s currently being held flat.
Which looks the best choice?
For me, this isn’t an easy choice. Aviva has the stronger dividend credentials, with better cover and a payout that’s still growing. It’s also the less speculative of the two businesses.
But I think Aberdeen offers more interesting growth potential from here. The shares have already re-rated as investors have recognised the progress at interactive investor. There could be scope for further gains if it can fix persistent outflows from its Adviser business.
That makes Aberdeen the riskier investment, particularly while its dividend isn’t covered by earnings. But it also means the shares could have much further to run if management can turn the business around.
Aviva may be the better choice for investors who are prioritising a growing income stream to consider. For me, though, Aberdeen’s combination of a roughly 6% yield, low valuation and potential for an earnings recovery makes it the more interesting opportunity.
And I can see a few other tempting FTSE 100 dividend stocks out there…
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Andrew Mackie owns shares in Aviva and Aberdeen.
This story originally appeared on Motley Fool
