How realistic is the 10%+ dividend yield from this FTSE 250 stock?

The FTSE 250 is brimming over with forecast dividend yields of 10% and even higher as we head into 2025. Can they keep going?

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FTSE 250 stocks are supposed to be about growth, while the FTSE 100 is where we look for dividends, right?

But right now, the smaller-cap index is home to some huge double-digit dividends. With annual FTSE 100 returns averaging 6.9% in the past 20 years, we surely have to sit up and take note of anything over 10%.

Today I’m looking at abrdn (LSE: ABDN) after its share price has plunged 23% in 2024. The fall has pushed the forward dividend yield up as high as 10.5%.

Should you invest £1,000 in Diageo right now?

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What it does

Abrdn is an asset manager, catering for institutional and retail markets. At the end of its third quarter at 30 September, it had assets under management and administration (AUMA) of £506.7bn. That was up 2% year to date.

The company formed from the 2017 merger of Standard Life and Aberdeen Asset Management. The resulting Standard Life Aberdeen was renamed during the great 2021 vowel shortage. Well, in 2021 anyway.

But very little has gone right since then. And despite an inital share price rise, we’ve seen a near constant fall to today.

Why it’s down

Losing some key customers in part kicked off the share price slide.

Lloyds Banking Group was the highest profile deserter. It withdrew £109bn of assets from abrdn, on the grounds that the combined company was now a competitor for Lloyds’ own insurance products.

Wind forward to 2022 and abrdn recorded a loss per share, and then only just scraped above zero in 2023.

Meanwhile, the company has kept its dividend at 14.6p per share every year since 2020, after slashing it from 2019’s 21.6p that year. That’s with earnings coming nowhere near covering it.

What next?

After this tale of woe, I can’t possibly be considering buying any shares, can I? Well, I don’t think the outlook is as bad as it might be painted.

Today, the broker consensus is against abrdn, though it looks like the City might be warming to it a little. The analysts’ average price target is, at least, above where it is now. As I write, the abrdn share price stands at 138p. And the 158p target would mean a 14% rise.

Also, high dividend yields aren’t so rare at the moment. I reckon the whole asset management sector could turn out to be undervalued.

Over in the FTSE 100, M&G is on a forecast yield of 10.3%, which isn’t far behind. Forecasts suggest earnings for this year also won’t cover the dividend. But we should see cover by 2025 in this case.

Will I buy?

I’m actually torn here, as I do think we could see a better year next year. And uncovered dividends aren’t always such a big deal in this kind of business, which can often see volatile cash flows.

If the company comes up with that 10% dividend this year, and makes positive noises about its cash outlook, I could see the stock beating broker targets.

I’ll pass on it, however, as I see other big dividends out there with less risk.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. 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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