Like many investors, I enjoy the passive income streams I can earn from owning dividend shares. One FTSE 250 share I used to own has had a tough year, with its share price falling over a fifth in just 12 months. That has pushed its dividend yield up to 10.8%.
A yield of almost 11% certainly grabs my attention. But, as many investors have learned the hard way, no dividend is ever guaranteed.
So could this be a bargain to snap up for my portfolio – or a value trap that might yet fall further?
Unconvincing dividend record
The share in question is the daftly named abrdn (LSE: ABDN).
While past performance is not necessarily an indication of what to expect in future, abrdn’s dividend history does immediately set an alarm bell ringing in my head.
The dividend has been held flat since 2020. That year saw a cut of around one third in the annual dividend per share. Prior to that, the ordinary dividend per share had been held flat for one year but before that it had been growing annually for a few years.
Before getting into the details of the business, that pattern alone makes this sound potentially like a situation where a company has been unrealistic about its long-term dividend capacity, tried to avoid a cut by holding it steady, and then faced the inevitable by lopping a big chunk off the payout.
Dividend potential – but also some clear risks
Is that what has happened at abrdn? To some extent, I think yes — and it may actually underplay the ongoing challenges the FTSE 250 firm may face in maintaining its payout.
Last year, the dividend of 14.6p per share was not covered by diluted earnings of 0.1p per share. The year before had seen a bigger gap, with the same dividend per share but a diluted loss per share of 26.6p.
Meanwhile, last year saw net cash inflows from operating activities double, to £221m. But that dividend was costing the company £267m, substantially more than its operating profit. That raises a red flag for me about the sustainability of the payout.
abrdn continues to battle risks such as investors pulling out more money than they put in. In its most recent quarter, institutional and retail wealth assets under management and administration shrunk slightly.
Set against that, the company’s interactive investor division reported higher assets under management and administration, as well as a net inflow of client funds. By building its digital footprint, abrdn is hoping to get on a growth trajectory once more. If that can help it generate more cash, the dividend may end up being safer than it currently looks.
I’m not ready to buy
Still, that remains to be seen. abrdn has a lot of work still to do and the outlook for investor demand in the next several years is unclear.
With rising living costs and a weak economy, I see a risk of outflows from the sorts of funds offered by abrdn.
So while the high yield is attention-grabbing, for now I will not be adding this FTSE 250 share to my ISA.
