Forget 1.5% from a savings account. I’d rather have FTSE 100-member HSBC’s 6% dividend yield

I believe HSBC Holdings plc (LON: HSBA) could deliver stronger total returns than the FTSE 100 (INDEXFTSE: UKX).

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 15 November, 2018 11:26 am GMT

| More on: CINEHSBA

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.

While the release of the Marcus savings account has been met with high demand from investors, in reality its 1.5% interest rate lacks appeal in my opinion. The FTSE 100, for example, has a dividend yield of around 4%, while HSBC (LSE: HSBA) offers investors an income return of 6% in the current year.

As well as its income return being four times that of the Marcus savings account, HSBC also offers strong growth potential. As such, it could be worth buying alongside another income share which released an upbeat update on Thursday.

Growth potential

The company in question is the world’s second-largest cinema chain Cineworld (LSE: CINE). Its trading update for the 2018 financial year-to-date highlighted revenue growth of 10.2% at constant currency. Admissions increased by 5.9% versus the same period of the previous year, with a strong film slate in the US, improving performance in Europe and the positive impact of estate refurbishments acting as catalysts.

Looking ahead, the company is upbeat regarding the integration benefits of recently-acquired cinema chain Regal. It also believes that there are a number of exciting new film releases for the remainder of the year, with the business on track to deliver on its guidance for the 2018 financial year.

Cineworld is expected to record a rise in earnings of 21% in the next financial year. This is forecast to boost its dividend payments that are set to be around 47% higher in 2019 than they were in 2017. This puts the stock on a forward dividend yield of 4.7% for 2019. With dividends due to be covered 1.9 times by profit, further growth could be ahead over the medium term.

Improving business

As mentioned, HSBC has a dividend yield of around 6% at the present time. The company, though, is in the process of delivering significant changes to its business model. Ultimately, they have the potential to deliver a more diverse, faster-growing business which is more efficient. However, in the short run, it could equate to a period of disruption, uncertainty and relatively slow dividend growth.

Of course, the company’s strong and growing presence in emerging markets across Asia could provide a significant catalyst on its future dividend growth. It is also exposed to a wide range of countries in the rest of the world, and this may lead to greater diversity and resilience when it comes to making dividend payments compared to some of its FTSE 100 dividend peers.

With HSBC trading on a price-to-earnings (P/E) ratio of around 11.3, it seems to offer good value for money. Although there are risks facing internationally-focused companies, with the prospect of higher US interest rates and tariffs being two obvious examples, the stock’s valuation suggests that there may be a wide margin of safety on offer. As such, it could offer high long-term total returns which easily beat the 1.5% interest rate on offer from the top savings accounts.