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FTSE wealth and investments group Aberdeen (LSE: ABDN) has dipped 8% from its 12 August 12-month traded high of £2.06. Consequently, this might be a good time for me to add to my holding in the high-dividend gem.
It certainly looks cheap on its 0.7 price-to-book ratio compared to the 2.8 average of its competitors. These comprise RIT Capital Partners at 0.8, M&G at 1.9, Bridgepoint Group at 2.8, and Legal & General at 5.6.
It also looks a bargain on its 2.5 price-to-sales ratio against its peer group’s 3.7 average.
And on the other of the major stock ratios I trust – price-to-earnings – it also looks a snip currently. It trades at 10.5 compared to the 36 ratio of its competitors.
How much passive income can it generate?
In 2024, Aberdeen paid a dividend of 14.6p. On the present £1.90 share price, this yields 7.7%.
This is over double the average FTSE 100 dividend yield of 3.4% and of its own FTSE 250 index’s 3.3%.
It is also a lot more than the ‘risk-free rate’ (10-year UK government bond yield), which stands at 4.6% now. This is important for me, as I want compensation for taking the additional risk of investing in shares.
Aberdeen has paid the same 14.6p dividend every year since 2020. And analysts forecast it will continue to do so until at least the end of 2027.
So, a £9,000 investment in 7.7%-yielding Aberdeen will give me £693 in first-year dividends. Over 10 years on the same average, this will rise to £6,930 and over 30 years to £20,790.
Far more could be made via dividend compounding
I nearly always reinvest the dividends paid by a stock back into it — known as ‘dividend compounding’. The only exception is if I want to use a payout for some major purchase in daily life.
Using this reinvestment process, the same £9,000 investment on the same 7.7% yield will make £10,390 in dividends after 10 years not £7,020. And after 30 years, it would be £81,003 instead of £21,060.
Including the initial £9,000 investment and the Aberdeen holding would potentially be worth £90,003 by then (although that is in no way guaranteed).
If it came to pass it would generate yearly average dividend payments of £6,930 by that point!
Will I buy more?
I first bought the stock when it was demoted from the FTSE 100 in August 2023. This had triggered a wave of automatic selling of the stock that I thought was unjustified by fundamental factors.
This is because FTSE 100 tracker funds were no longer able to hold the stock. And neither were funds that are only allowed to hold top credit-rated shares.
Shortly after this, Aberdeen announced a major reorganisation aimed at cutting costs and improving the product offering for clients.
This is still ongoing, and a risk for the firm is that it fails. However, it has produced excellent results so far. Last year saw an annual IFRS loss of £6m transform into a profit of £251m. In its H1 numbers this year, it saw its IFRS profit soar 47% year on year to £252m.
It is profit growth that ultimately powers any firm’s share price and dividends higher over time.
Given this, I will buy more of the stock very soon.
