I think investing in UK blue chip shares is the best way I can generate a passive income. It’s why I spend almost all the spare cash I have at the end of each month on FTSE 100 stocks.
But which stocks look good to pay a market-beating income now and in the future? HSBC Holdings (LSE:HSBA) and Rio Tinto (LSE:RIO) are two that have caught my eye.
Their large dividend yields can be seen below:
| Stock | Forward dividend yield |
|---|---|
| HSBC | 9.5% |
| Rio Tinto | 6.9% |
Based on these figures, a £20,000 investment distributed equally between these shares could give me a £1,640 second income this year. Here’s why I think they’re top stocks to consider today.
Banking powerhouse
With a large and growing focus on Asia, banking giant HSBC is vulnerable to current troubles in China’s economy. It endured an eye-popping $3bn impairment charge from its stake in a Chinese lender late last year. And further stresses may be seen across the business in the months ahead.
But this shouldn’t impact the bank’s ability to keep churning out gigantic dividends. The company’s cash-rich balance sheet — which supported the highest dividend since 2008 last year along with multiple share buybacks — should see to this.
HSBC’s Solvency II capital ratio stood at 14.8% as of December. That was up 60 basis points late last year, and exceeded the company’s target range of 14% to 14.5%.
This also supports the bank’s plan to repurchase another $2bn worth of its shares in 2024.
It’s important to note that HSBC is also set to pay a special dividend worth 21 US cents per share this year. This follows the sale of its Canadian operations for around $10bn last month.
With analysts also predicting a 57-cent ordinary dividend in 2024, this drives the yield on HSBC shares to an enormous 9.5%.
I think HSBC will be a great passive income share for years to come, supported by long-term growth in Asian banking demand.
Mining star
Like HSBC, Rio Tinto has considerable financial firepower it can use to continue funding large dividends. Even the impact of weak commodities demand on profits this year isn’t expected to throw the mining giant off course.
Okay, dividends are tipped to fall for a third successive year in 2024. But the yield still stands north of 6%. This is thanks to the company’s strong cash flows and relatively low debts (Rio’s net debt to EBITDA ratio stood below 0.2 times as of December).
Over the long term, I expect this FTSE business to deliver big dividends (and healthy share price gains) as the new commodities supercycle rolls on.
The growth of the green economy, rising urbanisation and infrastructure spending, and booming consumer electronics sales should all drive industrial metals demand higher. And with supply shortages tipped in some markets, the prices Rio Tinto asks for its product could explode.
This FTSE 100 firm has the scale to make the most of this opportunity, too, as well as a string of exciting exploration projects. Mining is unpredictable business, but Rio Tinto has proven it has what it takes to succeed.
