Yielding 9.3%, are abrdn shares a good buy for passive income in 2024?

abrdn shares have fallen significantly and currently offer a gigantic dividend yield. Is this a great income investing opportunity?

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abrdn (LSE: ABDN) shares offer an enormous dividend yield at the moment. Last year, the FTSE 250 wealth manager rewarded its investors with total dividends of 14.6p per share, which translates to a yield of around 9.3% today.

Are the shares worth considering for passive income? Let’s take a look.

Share price uncertainty

Whenever I’m looking at a stock from an income investing perspective, I like to ask two questions. First, could the share price fall significantly from here and wipe out any gains from dividends? And second, are the dividends sustainable?

Looking at the outlook for the share price here, I do have a few concerns.

Currently, abrdn has a very high level of short interest. This means that hedge funds are betting against the stock (i.e. they expect it to fall).

I imagine the main reason hedge funds are targeting the stock is that the asset manager is facing an intense level of competition from passive investment managers like Vanguard and iShares today.

Given that only 17% of abrdn’s equity funds outperformed their benchmarks last year, the company is likely to find it tough to attract and retain capital from investors going forward.

It’s worth noting here that after acquiring Interactive Investor a few years ago, abrdn is more diversified than it used to be.

But this area of the business is facing intense competition from lower-cost rivals too. Rivals here include Trading 212 and Freetrade, which are both having a lot of success and capturing market share from more established platforms.

Given the high level of short interest, I am not very confident in the share price. I don’t like to bet against the short sellers.

Dividend cut likely?

As for the dividend payout, I don’t have a lot of confidence in that either.

A simple way to work out if a dividend is sustainable to look at the dividend coverage ratio. This is the ratio of earnings per share to dividends per share.

A ratio of two or above suggests that a dividend is secure. By contrast, a ratio under one is a warning that the dividend could be cut.

I noted above that last year, abrdn paid out 14.6p per share in dividends. Well, this year, earnings per share are only expected to come in at 12.2p.

That gives us a dividend coverage ratio of 0.84, which is not good. That’s a red flag.

Another red flag is the fact that abrdn has been paying the same amount of dividends every year since 2020.

In my experience, this pattern often comes before a cut.

A yield trap?

Now, of course, abrdn does have some things going for it.

I think the company has a solid strategy. Currently, the group is focused on four main areas: Asia, sustainable investments, alternative investments and real assets, and UK savings and wealth.

All of these areas have potential.

I particularly like the focus on alternative investments. Today, demand for alternatives is rising rapidly.

Overall though, I don’t see the company as a good buy for passive income given the challenging backdrop.

I think it’s probably a ‘yield trap’ – a stock that looks appealing because of its high yield but is actually a risky investment due to weak company fundamentals.

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.

Edward Sheldon 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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