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Are the Standard Life share price and 8% yield too good to be true?

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Can you trust the 8% dividend yield on offer at Standard Life Aberdeen (LSE: SLA)? For income investors, this could be a golden opportunity to lock in a super-high, long-term yield.

On the other hand, there’s obviously some risk of a cut. So today, I want to take a closer look at this popular stock. I’ll also consider another unloved stock that’s yielding 6% and has caught my eye as a potential buy.

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Still a lot to prove

The merger of Standard Life and Aberdeen Asset Management was meant to leave shareholders with the best of both groups’ asset management businesses and some useful economies of scale.

Standard Life’s insurance assets would be sold, reducing the group’s capital requirements and opening the door to more generous shareholder returns.

So far, the evidence is mixed. The £.3bn insurance sale proceeded to plan and the combined firm now owns a 20% stake in insurer Phoenix. About £1,175m of cash from the deal has been, or will soon be, returned to shareholders.

The asset management side isn’t working so well. Net outflows from the group’s funds increased to £41bn last year, cutting assets under management by about 10% to £552bn. A decision last year by Lloyds Banking Group to remove £109bn of assets from the group was a further blow.

Why I’d buy

Standard Life Aberdeen has a lot to prove. But I think the share price reflects this. One valuation technique that’s often useful when assessing fund managers is to compare the firm’s market value with the value of its client assets.

For SLA, this gives a figure of about 1.2%, which is very low. By contrast, FTSE 100 rival Schroders has a ratio of 2% and at FTSE 250 firm Jupiter Fund Management the figure is 4%.

Standard Life Aberdeen’s low valuation may be justified at the moment. But any sign of improvement would be likely to trigger gains, in my view. The group now has a highly experienced new chairman on board, ex-HSBC chair Douglas Flint, who will probably be keen to see progress. Although the 8% dividend yield remains at risk of a cut, I think it’s a risk worth taking. I see this stock as a recovery buy at current levels.

A hidden gem?

Outsourcing group Babcock International (LSE: BAB) has lost the market’s trust over the last couple of years. The group’s shares have halved in value since late 2016 but, unlike rivals, it hasn’t run into financial problem or seen profits collapse.

One key difference may be that the group’s focus on defence contracting means that much of the work it carries out is skilled and essential. Although Babcock has historically relied heavily on UK government contracts, it’s working hard to diversify into markets such as North America and Australia.

Some investors remain bearish on Babcock. But in my view it seems increasingly likely that the shares are offering investors a good opportunity to buy. Underlying profits are expected to be flat this year, which should provide decent support for the 30p dividend.

The arrival of new chairwoman Ruth Cairnie could be the catalyst needed for investor sentiment to improve. With the shares trading on just 6 times 2019 forecast earnings and offering a 6% yield, I think this could be a good time to buy. I’ve added the shares to my own watch list.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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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