Should I buy Abrdn shares just for the 9.1% dividend? 

Abrdn shares looks dirt-cheap for my passive income portfolio. But can the asset manager sustain this sky-high yield in the long run?

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I believe we’ve been through the worst of this bear market. But inflationary pressures remain high in the UK. With the energy crisis wreaking havoc on fuel prices, inflation is expected to continue rising. So, I’m looking at passive income shares to generate a supplemental income stream. The FTSE 100 has some incredible dividend options and my search has led me to Abrdn (LSE:ABDN) shares.

The finance firm’s stock looks cheap right now with a yield of over 9%. But should I invest or be wary of a value trap? Let’s find out. 

Passive income is the way 

My main goal for my investing journey is to maximise savings from my day job and retire early. And this quest for financial freedom isn’t unique. Millions of investors have slowly woken up to the power of dividends. Looking at the Google search data for ‘passive income’ since 2004 (see chart below), the jump in popularity over the last two years is clear.

A stable passive income portfolio could be incredibly rewarding in the long run. Many investors have used dividends to retire in their 40s. And it doesn’t require complicated analysis either. Looking for stable businesses with strong cash flow and a history of dividend hikes is a good starting point. How do Abrdn shares fare in these areas? 

Share price analysis 

Abrdn shares are currently trading at 160p at a price-earnings ratio of a measly 3.5 times. Factoring in the 9.1% dividend yield, this asset manager’s stock looks very attractive on paper. 

But shareholders have been selling this stock in record numbers. Down 44% over the last 12 months, Abrdn shares rank 98th in the FTSE 100 for returns. 

Looking at the 2021 results, I think the asset manager had a strong year. Its fee-based revenue model generated over £1.5bn from its total assets under management (AUM) worth £542bn.

As of 2022, Abrdn’s 9.1% yield is covered 1.18 times on an adjusted capital generation basis. While this is higher than 2020’s cover of 0.84 times, the board has made it clear that the current 14.6p per share payout will remain unchanged until a capital cover of  1.5 times is met. 

This makes a dividend rise in 2022 unlikely. But the board is confident of a progressive dividend hike in the next few years so the firm may be able to maintain its high yield longer term.

A major concern here is the revenue from fees. The current economic slowdown is already affecting the average trading volume in the US and UK. People are likely to protect savings during inflation, which could cause private investment figures to drop. And historically, finance firms perform poorly during inflation because of lower activity. 

I also understand that passive income can’t make me rich overnight or completely offset the effects of inflation. Depending on my capital, it could take decades of diligent investing before payouts are large enough to support my retirement.

However, as a passive income option for the long term, the Abrdn share price looks very attractive right now. The company seems to be in a decent financial position and the board is expecting a tidy jump in earnings this year as well. But I think I will wait for the half-yearly results scheduled for 9 August. I’d consider an investment in Abrdn if the results look favourable.

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.

Suraj Radhakrishnan 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.

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