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To achieve long-term income, we need to look for stocks with high dividend yields, right?
However, a higher yield means more income. But there is no guaranteed profit, so we need to be careful.
For example, at the beginning of this year the forecast The Burberry Group the dividend increased by 7%. But my Motley Fool colleague Stephen Wright wrote that “it can be a brave investor who relies on that maintenance if things don't look good for the underlying business.“.
A few days later, the company posted an update saying “we have decided to suspend dividend payments in respect of FY25.” The yield dropped to zero percent.
And the telecoms giant Vodafone it was offering a fat dividend of 10%, but cut it in half the following year.
Reduce the risk
How do we reduce the risk of this type of damage? I see two important approaches.
One is diversification, putting our money in many companies in different sectors. Imagine having all of our money in the banks when they cut their dividends on the stock market risk of 2020, for example. We don't want that.
My second method of reducing risk is to look for companies that are in strong long-term businesses. Those that don't need a lot of money for big expenses, and that can be guided by my fashion and dynamic feeling.
My example is today abrdn (LSE: ABDN), i FTSE 250 investment manager, with a positive yield of 8.8%.
Financial risk
Investments like this are obviously risk-free, and can be hurt by bad economic times. Just look at the chart above to see how the past few years of high inflation and interest rates have affected the abrdn share price.
The company has cut its dividend by a third in the 2020 financial year. But it continued year after year since then. And since the share price is low, I think it would be a solid long-term income investment now.
But there is another caveat. The earnings forecast won't cover dividends for the next few years, and that's usually not a good thing.
However, an investment business is more difficult to judge by standard valuation criteria than others.
Check the cash
And with abrdn's H1 update in August, the company reported “Earnings were up 1% to £144m driven by higher adjusted profit after tax. It pays interim dividends of 1.11. (H1 2023: 1.04 times)“.
So the money seems to be there, with the development of the cover. And analysts expect the company to maintain current profit levels at least until 2026.
After that, I hope the investment business will be strong, and we can hope to see the profits grow again.
No-brainer?
For the risks I mentioned, no, abrdn is not what I bought. But it does satisfy some of the key criteria I always consider for passive income stocks.
It is in a business with strong long-term money making potential. The dividend yield is good, and the coverage is expected to improve.
And the share price has come down to what I think is an undervalue, which means I can lock in better dividend yields if I buy when it's low. I might do that.
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