I’d buy 1,775 shares of this stock to generate a second income of £50 a month

Building a second income can be a game changer for our finances. Choosing the right company is critical, and I really like the look of this one.

| More on:
UK money in a Jar on a background

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Adding a second income levels up personal finances in a number of ways. Maybe people can afford to try that fancy restaurant, go on that dream holiday, or just treat themselves every now and again. I’ve found a company which could be a great way to build that second income, let’s take a closer look.

My pick is

There are plenty of companies that have a high dividend yield, but not all of these are in great shape. In today’s uncertain economy, I want a company with a strong track record, healthy financials, and a great strategy. HSBC (LSE:HSBA) ticks all these boxes for me. Founded in 1865, this business has pretty much seen it all.

Building a second income

By owning shares in HSBC, individuals are entitled to a generous 5.59% dividend, meaning that for every £1,000 invested, shareholders will receive £55.90 per year. By buying 1,775 shares at the current price of £6.08, investors receive £50 a month as a second income.


As noted, not all companies paying such a high dividend perform well in the stock market. Many are unable to innovate, or have large levels of debt.

HSBC has a price-to-earnings (P/E) ratio of 5.2 times, cheaper than the average company in the sector with a P/E ratio of 5.7 times. Another metric I like to use to quickly analyse a company is a discounted cash flow calculation, which calculates an approximation of fair price. This calculation suggests that the share price is as much as 59% below the fair value of £14.94.

So with HSBC able to pay a generous dividend while also potentially undervalued, there could be an income from dividends, but also gains in the value of the share price too!

The risks

It’s never possible to guarantee success in the market, but especially so in the banking sector. With many complex aspects to juggle, it can be hard to see what might be the next risk. As the 2023 regional banking crisis showed, issues can escalate quickly, impacting an entire sector. Fortunately, HSBC has been through many periods of uncertainty before.

Admittedly, earnings growth is expected to decline next year, roughly in line with the banking sector. However, I would attribute this to general uncertainty in the market, and concerns around the levels of personal and business spending in the coming year due to high interest rates.

For me, the key risk here is HSBC’s exposure to the Chinese property sector. With $13.6bn invested, the company could be seriously impacted if the recent decline worsens. CEO Noel Quinn suggests the worst is likely over, but nothing is guaranteed.

Despite the uncertainty, history has shown us that owning banks when rates eventually reduce can be very lucrative. With the dividend expected to be 11.0% in 2024, I think there could be some great potential for a second income, and also in the share price over the coming years.

Will I be buying?

I love companies like HSBC that have been able to weather the storm over decades. With so much uncertainty in the world, I want to own resilient companies that can help me build a second income while also performing well in the stock market. I’ll be starting a small position at the next opportunity.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

Should we buy more FTSE 100 shares in December? The stats seem to say yes

The different months of the year should have no effect on where the FTSE 100 goes, should they? The evidence…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

8% yield! Here are the dividend forecasts for Barclays shares for 2024 and 2025

This FTSE 100 bank offers one of the biggest yield on the UK's blue-chip share index. But is it too…

Read more »

Young woman holding up three fingers
Investing Articles

3 reasons why Lloyds’ share price could surge through £1 in 2024!

Optimistic UK investors are buying Lloyds in the hope of a sharp share price rebound. Could the company be a…

Read more »

smiling couple holding champagne glasses and looking at camera at home with christmas tree
Dividend Shares

2 discounted high-dividend stocks on my Christmas list!

These top dividend stocks are already in the Christmas sales! I'm hoping to buy them to make a solid second…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

I’m eyeing these two cheap dividend shares for 2024!

This Fool likes dividend shares as a play for 2024. Here, he identifies two that look cheap and explains why…

Read more »

Investing Articles

This FTSE 250 growth machine is top of my list of stocks to watch in 2024

Despite a 13% fall, Games Workshop shares trade at a P/E ratio of 22. Stephen Wright plans to keep a…

Read more »

Investing Articles

The Tesla share price is a bargain to me

A lot of people think the Tesla share price is overvalued. Oliver Rodzianko disagrees. He tells us why he’s piling…

Read more »

Investing Articles

The BT share price is up 20% in a year. Should I buy now for 2024?

The BT share price has performed strongly so far in 2023. Christopher Ruane thinks it might keep moving up --…

Read more »