I purchased abrdn (LSE: ABDN) shares just lately as a key addition to my passive earnings portfolio. Passive earnings is principally common cash made by minimal day by day effort.

And as Warren Buffet put it: “In the event you don’t discover a strategy to make cash whilst you sleep, you’ll work till you die.”

The important thing function of ‘dividend compounding’

Like all of the shares in my passive earnings portfolio, abrdn pays a really excessive yield – at present 10.4%.

Which means that if I invested £20,000 now, I’d make £2,080 in dividends over the 12 months, with out doing something.

If I withdrew the dividends annually and spent them, after 10 years I’d have made £20,800 in passive earnings. That is on the proviso that the yield averages the identical over the interval. However yields rise and fall as annual dividend funds change and as share costs transfer.

Crucially although, if I reinvested the dividends paid me as an alternative of withdrawing them, I’d make rather more.

This is named ‘dividend compounding’. It’s the identical precept as compound curiosity in financial institution accounts, however slightly than curiosity being reinvested, dividend funds are.

If I did this, then my £20,000 after 10 years would have made £36,331 as an alternative of £20,800!

After 30 years of continuous to do that on the similar common yield, I’d have amassed £446,880.This is able to pay me £43,960in yearly dividends, or £3,663 a month!

There could be tax to pay in response to particular person circumstances, in fact. And inflation would have diminished among the shopping for energy of the earnings by then.

Nevertheless, it underlines how vital passive earnings might be revamped time if the fitting shares are chosen and the dividends are reinvested.

Shares in companies that look set to develop

The ‘minimal effort’ a part of passive earnings is targeted on two key areas in my expertise. First, choosing the proper shares to start with. And second, checking each quarter to see that they’re nonetheless performing as I would like them to.

Apart from paying huge dividends, all my passive earnings shares have two different important qualities.

One is that they appear to me as if they’re on a robust development trajectory. The reason being that the extent of dividends paid by a agency will depend on its earnings and income over time. If these decline, then the possibilities are that the dividends will drop as effectively.

One threat in abrdn is that its present enterprise reorganisation might fail ultimately. One other is that it is perhaps unable to draw new web inflows to its funds.

Nevertheless, consensus analysts’ expectations are that abrdn’s earnings will develop at 56% a 12 months to the tip of 2026.

Shares that look undervalued

The opposite important high quality is that its share value seems to be undervalued to me towards its friends. The explanation right here is that this reduces the possibility of a serious prolonged share value fall wiping out all my dividend good points.

On the important thing price-to-book (P/B) measurement of inventory worth, abrdn trades at simply 0.5. That is by far the bottom in its peer group, the common of which is 3.2.

This says to me that they appear very undervalued, in addition to being set for sturdy development and paying a really excessive dividend.