Here’s how many Hargreaves Lansdown shares I’d need for £1,000 a year in passive income

Hargreaves Lansdown shares are down 53% over the last five years. Here, I look at how much I’d need to invest to generate a grand a year.

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Hargreaves Lansdown (LSE: HL) shares have had a rocky few years, to say the least. In fact, as I write, the share price is 779p. That means the stock is down a shocking 68% in just under four years!

Yet the company remains the largest do-it-yourself investment platform in the UK. And the falling share price has pushed the dividend yield up to an eye-catching 5.2%. That’s well above the FTSE 100 average.

So is this a chance for me to pick up some shares and increase my passive income? Let’s take a look.

A grand a year in passive income

The company is expected to pay a dividend of 41.1p per share for its current financial year. That means I’d need 2,435 shares to receive £1,000 in annual passive income.

As things stand, that would set me back around £18,950.

Next year, the dividend is tipped to grow to 45.5p per share. So, assuming that payout is met, I’d get an income of £1,107 without buying any more shares.

Of course, no payout is ever guaranteed. However, the company does have a good track record when it comes to rewarding shareholders, including paying special dividends.

Why has the stock struggled?

There have been a couple of issues that have weighed heavily on the share price in recent years.

Firstly, in 2019, the Woodford Equity Income Fund ran into trouble and faced a wave of redemption requests. It eventually collapsed, leaving thousands of investors with their money trapped in the suspended fund.

Unfortunately, Hargreaves Lansdown had actively recommended this investment to customers on its platform. It suffered reputational damage over the issue, as well as a £100m lawsuit.

Secondly, there are question marks over the long-term viability of its dealing fees. The company currently charges as much as £11.95 per trade.

In contrast, Charles Schwab, one of the world’s largest investment brokers, reduced commissions to zero in the US in 2019. This means users do not pay any dealing charges or management fees.

Many companies now offer a similar service, including Robinhood, and Freetrade. And Charles Schwab is now expanding its zero-commission offering to UK investors.

None of this bodes well for Hargreaves Lansdown, as such fees do materially contribute to its financials.

For example, for the six months to 31 December 2022, the company reported £54.6m in fee-based revenue from stockbroking transactions. That equated to around 15.5% of its total revenue for the period.

And if we include platform fees, then that’s over half of the firm’s revenue that may come under pressure from competition.

Will I buy the stock?

There are things to like about Hargreaves Lansdown. It has a strong balance sheet, with a net cash position. And its current 92.1% client retention rate suggests that the majority of its 1.77m customers are currently satisfied with its service.

However, my fear is that the firm will fail to attract new — particularly young — customers in the years ahead due to its dealing charges.

Plus, existing customers could be tempted away by lower platform fees elsewhere. That would be disastrous, as a significant revenue stream now comes from interest on the cash deposits held in its customers’ accounts.

This uncertainty is why I’ll be looking elsewhere for passive income.

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.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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