FTSE 250 investment manager aberdeen (LSE: ABDN) has paid a 14.6p dividend every year since 2020. On the current price of £1.46 this gives an annual yield of 10%.
This is nearly three times the average 3.4% of its host index and more than double the FTSE 100’s 3.6% figure.
Looking ahead, consensus analysts’ forecasts are that the firm will keep paying a 14.6p annual dividend until at least end-2027.
A risk here is a long-lasting global recession that could cause clients to withdraw their funds from the firm. Another is another surge in the cost of living that could have the same result.
That said, its 30 April Q1 trading update saw a reiteration of the £150m cost savings targeted for this year. These will come as part of its ongoing restructuring programme that also seeks to improve client offerings.
It also committed to an adjusted operating profit above £300m in 2026 against 2024’s £255m and net capital generation of around £300m.
How much dividend income can be made?
On the current 10% yield, investors considering a £9,000 holding in aberdeen would make £900 in first-year dividends.
On this average rate (which is not guaranteed, of course) the figure would rise to £9,000 over 10 years, and after 30 years to £27,000.
That said, by using a common investment method known as ‘dividend compounding’ the returns could be much greater.
By doing this on the same 10% average yield, the dividends would be £15,363 rather than £9,000 after 10 years. And after 30 years on the same basis the figure would have grown to £169,537not £27,000.
Including the £9,000 stake and the value of the aberdeen holding would be £178,537 by then.
This would be paying £17,854 in annual dividend income by that point!
Can large returns be made from much less?
The common view that major returns from stocks can only be made from large amounts initially invested is not true.
Just £5 saved a day — £150 a month – invested at aberdeen’s current 10% yield could make £13,239 in dividends after 10 years. And after 30 years on the same basis the amount would have grown to £290,724.
Adding in the £54,150 in deposits made during the period and the holding would be worth £344,874.
This would be paying £34,487 a year in annual dividend income by that stage.
What about the share price?
I have made excellent dividend returns from my aberdeen holding since I bought it a while back. But I also think there is a good prospect that I could make money from a share price increase as well.
Specifically, its 0.5 price-to-book ratio looks very undervalued against its competitors’ average of 2.1. These comprise RIT Capital Partners at 0.7, M&G at 1.5, Bridgepoint Group at 2.3, and Legal & General at 3.9.
It also looks undervalued on the price-to-sales ratio, trading at 1.9 compared to its peers’ average of 3.6.
I ran a discounted cash flow valuation to put these numbers into a share price context. Using other analysts’ figures and my own shows aberdeen shares are 25% undervalued at their current £1.46 price.
Therefore, the value for them is £1.95, although stock prices go down and up, of course.
Given its excellent yield and share price undervaluation, I will be buying more shares very soon.
