I first bought shares in FTSE 250 investment manager abrdn (LSE: ABDN) after it was demoted from the FTSE 100 in 2023.
This may appear an odd choice to many, but I did it for three reasons that I still think hold good.
The price drop didn’t reflect fundamentals
The first was that the resultant price drop had nothing to do with the firm’s fundamental quality. This meant to me that a potentially huge value gap immediately opened in the stock.
Specifically, FTSE 100-tracker funds had no choice but to sell the shares when they fell out of the leading index. The same applied to funds only allowed to invest in FTSE 100 shares.
Company reorganisation in progress
Despite the company already being fundamentally very solid in my view, it embarked on a reorganisation. The aim of this was to cut costs, improve its offering to clients, and boost profitability.
A risk for my investment is if this reorganisation fails for some reason. However, it appears to be going well so far, with H1 results showing an IFRS post-tax profit of £171m. In the same period in 2023, it recorded a £145m loss.
Also positive was a 13% year-on-year reduction in operating costs over the same period – to £372m.
Its 24 October Q3 trading update showed assets under management increase 2% year on year – to £507bn.
Huge passive income potential
I am considering buying another £5,000 block of abrdn shares, bringing the total up to £15,000. The previous two blocks were bought around the same share price as now, when the dividend paid was also 14.6p. This currently yields a stunning 11.1% based on its present £1.32 share price.
In fact, abrdn’s dividend has been the same since 2020. And analysts forecast it will stay the same this year and next.
So, £15,000 invested in abrdn would make me £1,665 in annual ‘passive income’ (this is income made with minimal effort) from now. If the yield averages the current 11.1% over 10 years (which is not guaranteed) this would rise to £16,650 and over 30 years to £49,950.
How do I supercharge those returns?
These returns are a lot more than I could make in my standard UK savings accounts.
However, if I used the dividends paid to buy more abrdn shares (‘dividend compounding’) then they could be much greater.
In abrdn’s case, doing this would make me £30,284 over 10 years, not £16,650, if the yield averaged the same. On the same basis, this would increase to £397,709, rather than£49,950!
By that point – and adding in the initial £15,000 investment – my abrdn holding would be worth £412,709.
If the 11.1% yield was still in play, this would generate me £45,811 a year in passive income.
Assuming inflation over the period, the buying power of that money would have been diminished somewhat by then. However, I should have a much more comfortable retirement than I would if I relied on the State Pension.
Consequently, I will be buying the additional abrdn shares very soon.
The post Time for me to increase my holding in this 11.1%-yielding FTSE 250 gem to target £45,811 in annual passive income? appeared first on The Motley Fool UK.
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More reading
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Another £5,000 invested in this FTSE 250 high-yield gem could make me £968 a month in dividend income over time!
Simon Watkins has positions in Abrdn Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
