HSBC (LSE: HSBA) (NYSE: HBC.US) is one of those stocks that, in my view, should be a cornerstone of any income-focused portfolio.
The reason for this is fairly obvious: its prospective dividend yield is currently 4.8%.
Indeed, with bank savings accounts offering little more than 2% interest and inflation still being an issue for many income-seeking investors, a yield of 4.8% offers a return well above inflation and 2.5 times the amount received in a ‘high interest’ bank account.
Such an offer from one of the biggest banks (and companies) in the world is extremely tempting when the dividend yield of the FTSE 100 is just 3.5%, with the yield on the wider banking sector being just 3.2%.
However, a great yield is not the only reason why I’m keen to add to my holding in HSBC.
Indeed, HSBC continues to offer excellent value for money at current price levels. The price-to-book ratio is just 1.13 and highlights how little goodwill investors are being asked to pay for shares in the bank.
Moreover, with the banking sector experiencing heavy write-downs (and write-offs) of assets since the start of the credit crunch, it is highly encouraging to see that HSBC’s net assets have increased in each of the last four years. In fact, they are 88% higher than they were at the end of 2008, while many of the bank’s peers have seen their asset base shrink over the same period.
In addition, although the banking sector is now more competitive than it was five years ago, with the presence of various ‘challenger’ banks, it continues to benefit from high entry barriers.
Such barriers make life far easier for the likes of HSBC because it can utilise its vast size and scale to, for instance, offer more competitive switching benefits and even be a loss-leader (deliberately make a loss on certain products to attract new business). New entrants are unlikely to be able to do so, leaving the advantage firmly with incumbents such as HSBC.
So, a low price-to-book ratio and high barriers to entry, as well as a great yield, are the key reasons why I’m thinking of adding to my stake in HSBC.
