I’m buying dividend shares today so that when I retire, I can live off the passive income. The end goal is to be financially free.
Financial freedom will have a different meaning for everyone. For me, I want to be able to enjoy my later life and use the nest egg I’ve built over the years to supplement that.
Around 75% of my portfolio consists of shares that have a dividend yield of 4%, or higher. These are two of my favourites. In the months ahead, I want to increase my holdings.
HSBC
One of the best stocks I own, in my opinion, is HSBC (LSE: HSBA). Its yield has been steadily rising. Today, it stands at 7.9%.
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A sustainable yield is one of the main things I look for when targeting what companies to buy. Dividends are never guaranteed. Therefore, I want to feel confident that a business will keep rewarding shareholders.
HSBC has a good track record of that. Last year, its payout jumped to 61 cents per share. That’s a big leap from the 31 cents it paid in 2022.
It also announced a $2bn share buyback programme. With the cash it made from selling its Canadian business, it revealed it would pay shareholders with a one-off 21 cents per share dividend payment.
But I don’t just love HSBC for the income it provides. I’m also bullish on the bank’s future performance.
That’s because it’s heavily invested in Asia, a region that’s predicted to post strong growth in the decades to come. The Asian middle class continues to expand and with that comes demand for banking services. HSBC is in a prime position to capitalise.
That exposure does bring some risk. The Chinese economy’s going through a spell of volatility, which has harmed the HSBC share price. But trading on 7.2 times forward earnings, its shares look like a steal.
BP
The second stock on my list is BP (LSE: BP.). It yields slightly lower than HSBC, at 5.1%. But that’s still way above the 4% benchmark I aim for.
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Like HSBC, its dividend grew last year. It was upped 18% by the business to 28.4p per share. It also announced plans for a buyback programme worth $3.5bn in the first half of this year.
More widely, it aims to buy back $14bn worth of shares through 2025. That’s part of its commitment to return at least 80% of surplus cash flow to shareholders.
The largest threat I see to BP in the years and decades to come is the green transition. As we wean off fossil fuels and switch to renewable energy, BP will have to adapt. The stock’s also cyclical. Its share price tends to move up and down with rising and falling oil prices.
But trading on 7.5 times forward earnings, its shares look like cracking value. What’s more, with demand for oil actually expected to keep rising until the end of this decade, I like the look of the stock.
I’m optimistic HSBC and BP will be able to provide stable dividends. And I’m keen to buy more shares in both as I take a step closer to financial freedom.
