With HSBC (LSE: HSBA) now yielding 7.9%, many income-seeking investors may be wondering whether it’s too good to be true. After all, a dividend yield that high for one of the largest stocks on the FTSE 100 could indicate that a dividend cut is just around the corner.
Clearly, HSBC is enduring a challenging period, with doubts surrounding the future of the Chinese economy. This has weakened investor sentiment in HSBC and has pushed the bank’s share price down by 16% since the turn of the year, with the effect being to increase HSBC’s yield.
True, uncertainty about China may hurt investor sentiment further in the short run. Yet in the long term, the country’s transition towards being a more consumer-focused economy is likely to lead to rising profitability for banks such as HSBC, as credit becomes more in-demand. And although HSBC is struggling to get its cost base under control, it’s still expected to increase its bottom line by 3% this year and by a further 8% next year. This puts it on a dividend coverage ratio of 1.3, which indicates that dividends are well covered and could be set to rise at a modest pace.
Dividend appeal
Also offering upbeat dividend prospects is water services company Severn Trent (LSE: SVT). Its shares have beaten the FTSE 100 by 12% in the last year and offer a degree of resilience during an uncertain period. And with them yielding 3.9%, they remain a highly appealing defensive option that could continue to outperform the wider index if the volatility seen thus far in 2016 continues over the medium term.
With Severn Trent’s dividends being covered 1.25 times by profit, the company appears to have sufficient headroom when making payments to shareholders to allow for rises in dividend payments moving forward. Although they may not match the double-digit rises found elsewhere in the FTSE 100, dividend growth should at least match inflation for investors in Severn Trent. When combined with the company’s resolute share price performance, this makes it a worthwhile buy.
Income, growth and value
Meanwhile, RSA (LSE: RSA) continues to deliver on its turnaround plan, with the company’s most recent results highlighting the excellent progress being made. For example, RSA is forecast to record earnings growth of 43% in the current year, followed by further growth in net profit of 16% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.7, which indicates that capital gains are on the horizon.
As well as capital growth potential, RSA also offers excellent income prospects. It may only yield 3.4% right now, but with the aforementioned profit growth in the pipeline, RSA is due to yield 4.4% in 2017 from a dividend covered 1.9 times by profit. Therefore, further brisk gains in dividends could be ahead making RSA a strong income, growth and value play.
