In today’s challenging economic environment, investors have been rotating out of growth stocks and into value ones. What particularly attracts me to value stocks is their ability to generate a passive income for me. One sector I believe is primed to grow its dividend payouts in the years ahead is banking.
Dividend champion
FTSE 100 banking giant HSBC (LSE: HSBA) is one stock on my radar for generating passive income. Despite beating analysts’ profit expectations, the market didn’t warm to its third-quarter results. Yesterday, its share price fell 7%. Year-to-date, the share price has been flat.
In 2022, analysts are predicting a dividend per share (DPS) of 29 cents. At today’s share price, that equates to a yield of 5.8%. However, what really attracts me to HSBC shares, is the prospect of bumper returns in the years ahead.
For 2023, analysts are forecasting a 58% increase in DPS to 46 cents. This is on the back of materially higher expected returns. The company is also reinstating quarterly dividends.
Driving the improved performance of HSBC, is rising interest rates. In the last 18 months, net interest income (NII) has increased 30% to £8.5bn. Unsurprisingly, this has had a positive impact on the net interest margin (NIM).
Targeting £100 a month from HSBC shares
There are two methods I can employ in order to target £100 a month in dividend income from the shares.
Firstly, I could make a lump sum investment. Crunching the numbers, and assuming a forward yield of 9%, I would need to invest £13,300 to reach my target. At a price of around 443p per share, I would therefore need to buy 3,010 shares.
Secondly, and a better proposition for me, would be to build my position in the stock over time. I will make an initial investment of £1,000. Each month thereafter I will buy £100 of its stock. If I reinvest all my dividends too, in approximately seven years I would have reached my target of 3,010 shares.
Of course, these figures are purely illustrative. They assume that both the dividend yield and share price remain constant; a highly unlikely scenario.
Is HSBC’s dividend yield safe?
A key metric I look at when determining dividend sustainability, is dividend cover. This tells me how many times earnings are covered by DPS. In 2023 and 2024, analysts are predicting that earnings per share (EPS) will be 96p and 104p, respectively. Consequently, dividend cover is comfortably above the recommended two times.
However, the banking industry is a notoriously cyclical one and earnings estimates can change very quickly.
The macroeconomic environment has deteriorated during 2022. Rising inflation and stagnant growth have raised the spectre of the return of stagflation. Little surprise, therefore, that HSBC has significantly increased its expected credit loss (ECL) provisions. Its large exposure to China’s commercial real estate sector is another particular concern.
Despite these risks, I believe that HSBC is well placed to ride out the economic storm and emerge stronger.
Over the last few years, it has been exiting low-growth markets and pivoting toward Asia. A growing, propensity to save, middle class, coupled with low investment product penetration, provides HSBC with incredible growth opportunities. As its share price languishes, I intend to build a position in the stock.
