Investing in UK shares can provide a steady passive income. This approach is particularly relevant when considering stocks in the FTSE 250 index, known for its volatility compared to the more stable FTSE 100.
Focus on Aberdeen Asset Management
Aberdeen Asset Management (LSE: ABDN) has recently garnered attention for its recovery prospects. The company, which has faced significant challenges, is showing signs of improvement. Since reaching an all-time low in April, Aberdeen’s stock has surged by 70%.
Recent Trading Update
Aberdeen’s Q3 update reveals a reduction in outflows from its critical Adviser business. Key highlights include:
- Net outflows decreased to £500 million, halving compared to earlier reports.
- Total year-to-date outflows are currently £1.4 billion.
Two main factors contribute to this positive trend:
- A comprehensive repricing of its fund portfolio.
- Significant investments in enhancing client experience, particularly in service improvements.
These initiatives have helped Aberdeen serve approximately 400,000 end customers, including around half of all independent financial advisers (IFAs) in the UK.
Investment Potential
Despite its recent recovery, Aberdeen offers an attractive dividend yield of 7.1%. While the dividend per share is not expected to increase before 2027, investors can reinvest dividends to acquire more shares.
The concept of compounding can significantly enhance investment growth over time. By reinvesting dividends, investors create a self-sustaining cycle of income generation. This compounding effect can lead to substantial portfolio growth after several years.
Risks to Consider
The asset management sector is undergoing rapid changes due to the rise of low-cost tracker funds. More than half of global capital is now invested in exchange-traded funds (ETFs), which offer low fees and diversification. This trend has pressured traditional asset managers like Aberdeen.
Aberdeen has been slow to adapt to these changes, facing challenges such as:
- Continuous fee compression.
- Intensifying competition from passive investing products.
Looking Ahead
Aberdeen’s recent success with its direct-to-consumer platform, Interactive Investor, underscores its potential for growth. While immediate improvements may not be expected, the current 7.1% dividend yield presents an appealing opportunity for investors. This allows them to benefit from a solid income stream while awaiting long-term price appreciation.
In summary, investing £5,000 in Aberdeen shares could present a compelling opportunity. The combination of a high dividend yield and the potential for capital growth makes it an attractive consideration for long-term investors.
