Stock market

Yielding 9.3%, are abrdn shares a good buy for passive income in 2024?

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abrdn (LSE: ABDN) shares currently offer a very high dividend yield. Last year, the FTSE 250 wealth manager rewarded its investors with a total dividend of 14.6p per share, which translates to a yield of around 9.3% today.

Are shares worth considering for passive income? Let’s take a look.

Share price uncertainty

Whenever I’m looking at a stock from an income investing perspective, I like to ask two questions. First, could the share price fall significantly from here and wipe out any gains from dividends? And second, are dividends sustainable?

Given the share price outlook here, I have some concerns.

Currently, short interest in abrdn is high. This means that hedge funds are betting against the stock (that is, they expect it to fall).

I imagine the main reason hedge funds target stocks is that asset managers today face intense competition from passive investment managers like Vanguard and iShares.

Given that only 17% of abrdn’s equity funds outperformed their benchmarks last year, the company is likely to find it difficult to attract and retain capital from investors going forward.

It’s worth noting here that abrdn is more diversified than ever after acquiring Interactive Investor a few years ago.

But this sector of the business also faces fierce competition from lower-cost rivals. Competitors here include Trading 212 and Freetrade, both of which are enjoying great success and taking market share from more established platforms.

Given the high level of short interest, I am not overly confident in the share price. I don’t like to bet against short sellers.

The possibility of a dividend cut?

As for the dividend payout, I don’t have much faith in that either.

A simple way to work out if the dividend is sustainable is to look at the dividend coverage ratio. It is the ratio of earnings per share to earnings per share.

A ratio of two or above indicates that the dividend is safe. Conversely, a ratio below one is a warning that the dividend may be cut.

I noted above that last year, abrdn paid 14.6p per share in dividends. Well, this year, earnings per share are expected to come in at just 12.2p.

This gives us a dividend coverage ratio of 0.84, which is not good. This is a red flag.

Another red flag is the fact that abrdn has been paying the same dividend every year since 2020.

In my experience, this pattern often comes before the cut.

A yield trap?

Now, of course, abrdn has a few things going for it.

I think the company has a solid strategy. Currently, the group focuses on four key areas: Asia, Sustainable Investments, Alternative Investments and Real Assets, and UK Savings and Wealth.

There is potential in all these areas.

I especially like to focus on alternative investments. Today, demand for alternatives is growing rapidly.

Overall though, I don’t see the company as a good buy for passive income given the challenging backdrop.

I think this is probably a ‘yield trap’ – a stock that looks attractive because of its high yield but is actually a risky investment because of the company’s fundamentals.

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