How Safe Are The 6%+ Yields At HSBC Holdings plc & SSE PLC?

HSBC Holdings plc (LON: HSBA) and SSE PLC (LON: SSE) may be an income seeker’s delight today but will they still please us tomorrow? Harvey Jones peeks under the covers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors are instinctively suspicious of high-flying dividends but today they’re absolutely paranoid, as payouts crash to earth again and again. Before investing in any stock, you need to be confident that the dividend is secure, because if it plummets the share price will instantly follow.

Chinese Arithmetic

Global bank HSBC Holdings (LSE: HSBA) soared as investors clambered on board, delighted by its exposure to booming Asia and China, unaware of the turbulence ahead. Briefly labelled the “good bank” after the financial crisis because it didn’t need a government bailout, performance has been pretty dreadful since, with the stock now 30% lower than it was five years ago.

It continues to fall, dropping 15% in the last six months, as China wreaks havoc on the global stage. This leaves it trading at a tempting 10.4 times earnings, and crucially for income seekers, yielding a juicy 7.2%. But is the yield now flying too close to the sun?

Cover bother

Currently, HSBC’s yield is covered 1.4 times, which is relatively respectable. But just as you should never judge a book solely by its cover, you also have to dig deeper with the dividend. Last year, Standard Life fund manager Thomas Moore did just that, and ended up offloading HSBC, warning of “pedestrian dividend growth” or worse. With the bank shedding jobs to cut costs, and forced to set aside increasing amounts of capital to appease regulators, Moore warned that funding the payout will prove tough. That was half a year before China crashed.

High compliance costs, fines and low interest rates will make it tough for Stuart Gulliver to fulfil his pledge to boost shareholder payouts. Last year, 50,000 jobs were culled in a bid to keep the income flowing, while unprofitable units were dumped. Worryingly, Gulliver is doubling down on his losing China/Asia bet, while the market meltdown imperils investment banking profits. The dividend looks secure for now, but Gulliver’s gamble must pay off to ensure it’s covered in the years aead.

Our friend electric

If you hold utility giant SSE (LSE: SSE) in your portfolio, you’re almost certainly doing it for the income as growth prospects have been less than electric in recent years. That said, it has done exactly what utility stocks say on the tin, providing defensive solidity in troubled times, with the share price down just 4% over the last year. Over five years, it’s up a solid 18%, while the FTSE 100 is slightly down over the same period.

SSE is nevertheless all about the yield, and it currently distributes a heartwarming 6.31% covered 1.3 times, slightly below management’s long-term target of 1.5. Until relatively recently, management was promising above-inflation dividend payouts, and still says it will hike the dividend at least in line with RPI inflation (1.2% in December). That will prove quite an effort, given that cash flow didn’t cover the dividend last year.

As with HSBC, SSE’s payout looks safe for now, but the flat outlook for revenues and profits over the next year suggests management faces an uphill struggle fulfilling its pledges to investors in the longer term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »