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I bought shares in FTSE 250 investment firm aberdeen (LSE: ABDN) at the beginning of September 2023. This was just after it had been demoted from the top-tier FTSE 100.
It looked like a very good buy to me at that point for two reasons.
First, the share price had plummeted after the demotion announcement due to automatic selling. The solid fundamentals of the business as I saw them had not changed overnight.
The selling occurred because FTSE 100-tracker funds could no longer keep a FTSE 250 holding in their portfolios. The same applied to funds that are only allowed to invest in stocks in the leading index.
This signalled a possible major bargain to me — confirmed by a discounted cash flow (DCF) analysis I ran at the time.
The second reason was because the firm had long paid out big dividends. Aged over 50, I buy such shares so I can increasingly live off the dividends they generate when I decide to do so. Based on other analysts’ forecasts and my own, I thought it very likely it would keep paying these high figures.
Looking back on my buy, I am very pleased with the results.
How much has been paid in dividends?
I tend to take a gradual approach to building up holdings in newly demoted stocks – generally increments of £5,000. This bought me 3,048 shares in aberdeen at the 1 September 2023 opening price of £1.64.
Since then the firm has paid 21.9p in dividends, as I narrowly missed out on 2023’s first dividend of 7.3p. Nevertheless, this means I have made £668 in dividends since then – a return of over 13%.
What about share price gains?
I was not particularly expecting any major gains in share price from the stock in such a short time.
However, the shares have risen 30p from when I bought them to their current price of £1.83.
The latest boost to the price came after investment bank JP Morgan upgraded the stock to Overweight from Neutral. The new rating means the bank thinks the stock will outperform its sector.
This gives a profit on the share price of an additional £914 – an 18% return.
So, the total profit made from this and the dividends since 1 September 2023 is £1,582. This is a total return of 32% over slightly less than two years.
Looking ahead
A risk to aberdeen is another major surge in the cost of living that might cause investors to withdraw funds.
However, analysts forecast that it will continue to pay an annual dividend of 14.6p this year, next year, and in 2027.
Based on the current share price, this would generate a yearly yield of 7.5%.
If the stock averaged a 7.5% yield over the next 10 years, then my £5,000 would make £5,560 in dividends. And if it averaged the same over 20 years I would make £17,304.
This is based on me reinvesting the dividends into the stock – known as ‘compounding’ — which I would do until I wanted to live off them instead.
As for the share price, today’s DCF shows the stock is 45% undervalued at £1.94. So, its fair value is £3.53.
Given its strong forecast gains in dividends paid and share price, I will buy more of the shares very soon.
