The main reason I own dividend shares is the extra income they can provide for me. At the moment, a couple of such stocks that I own are selling at a price that yields above 9%. I am considering topping up my position – here is why.
Long-term prospects from dividend shares
The sort of dividend shares I like to own in my portfolio are ones that offer me good income prospects not only now but also in the future.
At the moment there is a looming risk of an economic downturn. That could hurt income at some companies, reducing or eliminating altogether their ability to pay dividends. After all, dividends are never guaranteed.
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So I am looking for companies I hope can perform well in coming years. The two shares do both face risks from a worsening economy if it leads customers to withdraw funds from their services. That could hurt profits. But with a generous yield north of 9% in each case, I am happy to take that risk as I think it is already reflected in the share prices.
Asset managers
The two shares in question are M&G (LSE: MNG) and abrdn (LSE: ABDN). Both are asset managers. Both have a juicy dividend yield: 9.3% at M&G and 9.9% at Abrdn. So if I invested £10,000 evenly across the duo today, I would be eyeing annual income from these two dividend shares close to four figures.
I think the bull case for both is similar. They benefit from strong brands that can help them attract customers (despite abrdn’s silly corporate name, it also owns the Interactive Investor operation). They both have long experience and deep expertise when it comes to investing. That can help them in running their businesses and attracting new clients.
Attracting and retaining clients is a key challenge right now in the asset management industry. At the half-year point, M&G saw net client inflows of funds (outside its Heritage business). M&G saw net outflows of about 1% of assets under management. Compared to the picture at rivals like Jupiter, I see this performance as decent.
Both M&G and abrdn have a policy of aiming to maintain their dividend – M&G even wants to raise it if it can. But there is a risk that market turbulence hitting profits could hurt dividend cover. abrdn, for example, held its interim dividend flat, but the cover on an adjusted capital generation basis fell to 0.7 times in the first half. That is not sustainable in the long term, so I am hoping that it will focus on stemming outflows like M&G has been doing. After falling out of the FTSE 100 last month, I feel Abrdn has work to do on reassuring shareholders that it plans to return to growth mode.
Why I own these shares
Despite the risks, I think both businesses have good long-term prospects. Meanwhile, if they can deliver on their policies and keep the dividends flowing at their current level, I will be handsomely rewarded as a shareholder.
For that reason, I plan to keep holding both of these dividend shares in my portfolio and would consider buying more.
