£9,000 of savings invested in abrdn shares could make me a £12,826 a year second income!

abrdn appears set for strong growth, looks undervalued, and pays a very high dividend yield that can make me a big second income.

| More on:
A pastel colored growing graph with rising rocket.

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.

Making one steady salary is good, but generating a second income is even better.

On the one hand, it provides an additional financial safety net against any nasty turn of events. On the other, it allows for more of life’s good things to be experienced and enjoyed.

Investing in high-yielding shares is the best way I have found of doing this.

It can generate both regular returns and increases in original capital, unlike gold. And it comes with minimal daily effort involved, unlike some other passive income ideas.

In fact, the only real effort involved is initially selecting the shares and then periodically monitoring how they perform.

My three key factors in share selection

First, each share selected should pay high dividends to maximise the second income generated. So, the higher the better, in my view.

Then the chosen company should also look set for future growth. This is what powers rises in share price rises and dividends over time.

And its shares should look undervalued compared to its peers. This reduces the chances of an extended share price drop wiping out dividend gains.

I recently bought abrdn (LSE: ABDN) shares for these three reasons.

Ticking all the boxes

On the first point, it paid a total dividend of 14.6p a share in 2023. On the current price of £1.57, this gives a yield of 9.3%. This is one of the very highest in any FTSE index.

On the second, a risk in the company is that its current reorganisation does not result in higher earnings. Another is that the recent net inflow of assets under management reverses.

However, consensus analysts’ estimates are that earnings will grow at 55.9% a year to end-2026. Earnings per share are forecast to increase by the same level each year to that point.

And on the third point, it currently trades on the key price-to-book (P/B) measurement of stock value at just 0.5. This is by far the lowest in its peer group, the average of which is 3.5. This says to me that they look very undervalued.

A turbo-charged high yield

So, £9,000 invested at 9.3% would make £837 this year in dividend payments.

If the yield averaged the same over 10 years, the dividends would be £8,370 on top of the £9,000 investment.

Crucially however, these returns could be turbo-charged by reinvesting the dividends paid back into the stock.

This is known as ‘dividend compounding’ and is the same process as compound interest in a bank account. But rather than interest being reinvested, dividend payments are.

If this was done, then the dividend payments after 10 years would total £13,729 instead of £8,370!

This would mean £22,729 in total, paying £2,011 a year in dividends, or £168 a month.

Over 30 years on an average 9.3% yield, the investment pot would total £144,962, paying £12,826 a year, or £1,069 a month!

Inflation would reduce the buying power of the income over time, of course. And yields can go down as well as up, depending on dividend payments and share prices.

However, it highlights that relatively small investments in the right stocks can generate a significant second income if the dividends are reinvested.

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.

Simon Watkins has positions in Abrdn Plc. 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

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »

Satellite on planet background
Investing Articles

At just under £14, can BAE Systems’ share price still be a prime FTSE 100 bargain? 

Despite its bullish price run, BAE Systems’ share price still looks undervalued to me and appears set for strong growth.

Read more »

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

This dividend stock could pop next week!

This dividend stock happens to have one of the biggest dividend yields I've come across -- 10.7% -- but I'm…

Read more »