FTSE 250 investment manager Aberdeen (LSE: ABDN) paid a total dividend in 2024 of 14.6p. This gives a dividend yield on the current £2.03 share price of 7.2%.
It paid the same dividend in each of the past five years, beginning in 2020. These generated average dividend yields in those years, respectively, of 2020’s 5.2%, then 6.1%, 7.7%, 8.2%, and 10.3%.
Analysts’ consensus forecasts are that it will also pay the same dividend this year, next year, and in 2027.
How much dividend income could this make me?
Given this, another £20,000 invested by me in the stock now will make £21,000 in dividends after 10 years.
This also reflects my reinvesting the dividends straight back into the stock – known as ‘dividend compounding’.
On the same basis (which is not guaranteed, of course), this amount would increase to £152,307 after 30 years.
Including the initial £20,000 investment, the total value of the holding would be £172,307 by then.
This would generate an annual dividend income for me at that point of £12,406.
Does the underlying business look solid?
A firm’s ability to keep paying a high level of dividends depends on the solidity of the underlying business.
In this context, all of Aberdeen’s results this year have looked good to me.
The 2024 numbers released on 4 March this year saw an IFRS profit of £251m. This compared to a £6m loss the previous year.
Its 30 April Q1 trading update saw a reiteration of 2026 targets of a £300m+ operating profit and around £300m of net capital generation.
Following this, investment bank JP Morgan upgraded Aberdeen to Overweight from Neutral. This indicates that it expects the stock to outperform its sector.
In the July H1 numbers, IFRS profit soared 47% year on year to £252m. Net capital generation jumped 7% to £111m, and diluted earnings per share leapt 48% to 13.5p.
At that point, the firm highlighted that price cuts at its Adviser arm designed to compete with lower-fee rivals would squeeze its margins. This remains an ongoing risk.
That said, its Q3 trading update released on 22 October showed assets under management rose 6% to £542.4bn.
And the firm reiterated its 2026 targets of adjusted operating profit above £300m, and net capital generation of around £300m.
It is ultimately profits that power any firm’s dividends (and share price) higher.
My investment view
Aberdeen began a deep reorganisation after it had been demoted from the FTSE 100 in August 2023.
This broadly focused on reducing costs, cutting layers of middle management, and improving the client experience.
The subsequent results attest to its success so far in these aims, in my view.
This has also been reflected in an increase in value in the stock price. I do not intend to sell any of my high-dividend-yielding stocks. However, it is comforting to know that if I do, I might also make a profit on that.
More specifically here, a discounted cash flow valuation shows Aberdeen shares are 44% undervalued at their current £2.03 price.
Therefore, their fair value is £3.63.
Consequently, given its solid fundamentals, high yield, and deep undervaluation, I will buy more of the stock shortly.
