1 undervalued income stock investors should consider buying for retirement

This Fool’s been on the hunt for the best income stock to retire on and HSBC has piqued his interest. Here he explains why.

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I’ve been looking for top-quality income stocks and HSBC (LSE:HSBA) stands out as an absolute steal to me at the moment. That’s even after a 14.6% rise in the last 12 months.

Slashed price

That said, while its share price has been gaining momentum, it’s still down 2.2% over the last five years. But right now, I sense an opportunity.

The shares are trading on just 7.1 times earnings. Granted, a lot of FTSE 100 banks look cheap as chips these days. However, that’s still a lot cheaper than the index’s average of 11.

A rising yield

Based on its current share price of £6.45, the stock pays a dividend yield of 7.4%. When you take into consideration the special dividend it plans to pay out this year after selling its Canadian unit for $9.96bn, its prospective yield rises to a whopping 9.4%.

Forecasts have the yield placed at 7.4% for next year, rising to 7.9% for 2026. That’s considerably above the Footsie average of 3.9%.

One for retirement

But if I’m investing for my later years, I want a stable income. We’ve seen through events such as the global financial crash and more recently the pandemic that dividends can be reduced or cut altogether. If I’m using the income from dividend shares for my retirement, I want it to be reliable.

With HSBC, I’m confident it will be. There are a few telling signs. To kick things off, management’s reiterated its commitment to return 50% of earnings to shareholders via dividends.

What’s more, its payout has been growing in recent years. 2023 saw the business up its total dividend by 91.8% as it paid out 61 cents per share compared to just 31 cents for 2022. It’s these sorts of progressive actions that are key to look for when I consider buying a stock.

Growth opportunities

But aside from the attractive income potential, I also want to see share price growth. That’s where HSBC’s Asian focus comes into play.

The bank generates over half of its revenues from mainland China and Hong Kong. At the moment, that’s proving to be an issue. The Chinese property market’s flagging.

A writedown in the valuation of HSBC’s stake in China’s Bank of Communications saw its share price nosedive 8% after its full-year results were released back in February.

But in the long run, I see its focus on the region paying dividends (quite literally). The middle class in Asia continues to expand and with that will come a rise in demand for banking services.

HSBC has earmarked over $6bn of investment for the region in recent years. I’d expect this to increase in the times ahead.

A solid buy

At their current price, I think HSBC shares are an attractive proposition for investors. They offer a blend of a low valuation and a high, stable yield. Owning the stock is also an effective way to gain exposure to Asia’s long-term growth prospects. If I didn’t already own HSBC shares, I’d buy them right now.

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. Charlie Keough has positions in HSBC Holdings. 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.

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