FTSE 250 investment firm aberdeen (LSE: ABDN) has dropped 25% from its 4 March one-year traded high of £1.86.
A stock’s yield moves in the opposite direction to its price, given the same annual dividend. The fall in aberdeen’s share price means its yield has now been pushed up to a stellar 10.4%. By comparison, the current average yield of the FTSE 250 is 3.4% and of the FTSE 100 3.6%.
Moreover, the firm has paid the same 14.6p every year since 2020. And consensus analysts’ projections are that it will continue to do so in 2025, 2026 and 2027 at least.
How solid is the business?
A risk to these payouts is that the US’s new protectionist tariffs prompt a global recession. This could cause investors to withdraw funds from aberdeen to safeguard their assets.
I have heard it said that this is also a risk to investment firms as it makes picking winners more difficult.
It does, but as a former senior investment bank trader I know that is what they are paid to do. And highly volatile markets make big profits more readily available to firms that know what they are doing.
Recent results look very good in this context to me. Its 4 March 2024 numbers showed adjusted operating profit of £255m against 2023’s £249m. This helped turn a £6m loss before tax into a £251m profit last year.
The turnaround here results from an ongoing reorganisation. It aims to reduce costs (mainly in middle management) and improve the service for clients.
In 2024, it cut total administrative and other expenses by 10.3% year on year to £1.313bn. Net capital generation – a powerful engine for growth – jumped 34% to £238m over the same period.
The firm says it remains on track to deliver at least £150m in cost savings by the end of 2025. And by 2026 it aims for an adjusted operating profit of over £300m and net capital generation of around £300m.
Huge dividend income potential
Investors considering a holding of £5,500 (half the UK average savings) in aberdeen would make £572 in first-year dividends.
On the same average 10.4% yield, this would rise to £5,720 after 10 years and to £17,160 after 30 years.
That said, far greater returns can be made if ‘dividend compounding’ were used here. This simply involves the dividends paid by a stock being reinvested back into it. It is just like leaving interest in a bank savings account to grow.
On this basis and the same 10.4% average yield, dividends would increase to £9,293 after 10 years, not £5,720. And after 30 years on the same basis, this would jump to £101,513 instead of £17,160.
Adding in the initial £5,500 stake and the total holding would be worth £107,013 at that point.
This would pay £11,129 in annual dividend income by then!
Will I buy more of the shares?
I already own a sizeable stake in aberdeen at a variety of price entry points. However, given its good business prospects in my view and its stunning yield, I will buy more shares very soon.
