9.8% yield! Might this well-known FTSE 250 stock deliver its dazzling dividend for decades?

Few shares have a dividend yield approaching double digits. But this FTSE 250 company does! Christopher Ruane weighs the investment case.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What is the difference between a dividend yield of 3.1% (the FTSE 250 average) and one of 9.8%? In the short term, it is £6.70 per year for each £100 I invest.

I am a long-term investor though. Over the long term, that difference is enormous.

Imagine I invest £1,000 today and compound it at 3.1% annually for 3.1%. After 30 years, it should be worth £2,499. If I invest that £1,000 today and compound it at 9.8% annually for the same period, after 30 years it should be worth £16,522!

Looking to the long term

Compounding partly works on the basis of the price at which I can make a share purchase in future. In practice, nobody yet knows that. But it also relies on a given dividend yield, in this case, a steady 9.8% for 30 years.

One well-known FTSE 250 share that currently offers such a yield is abrdn (LSE: ABDN). Can it maintain that payout in decades to come?

Patchy track record on dividends

Although past performance is not necessarily a guide to what may happen in future, it can provide investors with useful context.

Over the past seven years, the FTSE 250 financial services firm has not raised its dividend per share at all, but has cut it twice.

Created using TradingView

The reason? Basically, the business performance has been very inconsistent. Indeed, a quick look at the firm’s history of basic earnings per share makes the point.

Created using TradingView

Hard to judge where things might go

On one hand, earnings per share are not a great metric to use when assessing a financial services company. Factors like asset valuation changes can affect earnings dramatically, even though they may not affect cash flows.

On the other hand, such inconsistent earnings (including some notable losses) do not strike me as consistent with a successful, well-run company plotting a path to the sunlit uplands of maintaining or growing shareholder payouts. There is a reason abrdn has cut its dividend repeatedly over the past seven years.

I think that has partly reflected an underperforming business strategy that has been changed along the way. As its daft name reflects, the firm has suffered something of an identity crisis, which may not be a good way to attract clients in an industry where consistency is valued highly.

Still, the firm has a sizeable client base. In the first quarter of the year, assets under management and administration grew slightly compared to the prior quarter, reaching over half a trillion pounds. This is no FTSE 250 minnow.

A cost-cutting programme could help boost profitability (though I also see a risk it could backfire if it reduces staff productivity). The interactive investor platform could help boost abrdn’s long-term potential as more investors choose to invest digitally.

Potential for ongoing high income

A financial downturn could hurt that performance though, if investors lose their enthusiasm just like abrdn lost its vowels.

Still, although the dividend could fall again if business is weak, if the company maintains its performance, the high payout may stay.

So from an income perspective, I see abrdn as a FTSE 250 share investors should consider buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »