Is Aberdeen Asset Management plc a better dividend stock than J Sainsbury plc & Royal Mail plc after today’s update?

Today’s first-half update from Aberdeen Asset Management (LSE: ADN) hasn’t been well-received by the market, with the investment manager’s shares falling by around 7%. That’s because Aberdeen has reported a fall in net revenue of 20% versus the first half of the prior year, with its underlying pre-tax profit declining by twice that.

The main reason for such a disappointing performance has been weakness in emerging markets. Looking ahead, further challenges can’t be ruled out in the short-to-medium term, which is a key reason why Aberdeen’s bottom line is due to fall by 37% in the current year. And while it’s investing in bolt-on acquisitions as well as in strengthening its own balance sheet, Aberdeen’s dividend is coming under pressure.

While Aberdeen has maintained its dividend for the half-year and expects to record substantial cost savings moving forward, its dividend is due to be covered just once by profit this year. In other words, all of the company’s profit is forecast to be paid out as a dividend and while this may be possible in the short run, it can’t be sustained in the long run as all businesses require a degree of reinvestment.

However, with Aberdeen yielding 7.1%, it appears as though the market has already priced in a dividend cut. As such, it remains a very appealing income play which would still yield 3.5% even if dividends were halved. And with the potential for rapid growth in emerging markets in the coming years, Aberdeen remains a highly appealing, albeit rather uncertain, income stock.

Challenging outlook

Another company with an enticing but yet relatively risky dividend is Sainsbury’s (LSE: SBRY). It currently yields a more modest 3.7% but unlike Aberdeen its dividends are covered more than twice by profit.

Looking ahead, Sainsbury’s is due to report a fall in its bottom line over the next couple of years, but if the Home Retail acquisition goes ahead then it could act as a positive catalyst and lead to better performance for Sainsbury’s than the market currently anticipates. But with a lower yield than Aberdeen and a challenging outlook, Sainsbury’s seems to be a less obvious income choice for the long term.

Income pick

Meanwhile, Royal Mail (LSE: RMG) is also a strong income play, with it currently yielding 4.7% from a dividend covered 1.7 times by profit. As such, it seems to offer a relatively high yield, while also having much more headroom than Aberdeen when making payments to its investors. This shows that while Aberdeen may cut dividends, Royal Mail looks likely to increase them at a brisk pace over the coming years.

Furthermore, with Royal Mail due to increase its earnings in each of the next two years, it seems to be facing less difficult trading conditions than Aberdeen or Sainsbury’s. This means that its business performance and share price performance may be less volatile, thereby making Royal Mail the best income option of the three stocks discussed here.

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Peter Stephens owns shares of Aberdeen Asset Management, Royal Mail, and Sainsbury (J). The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.