High-yielding FTSE 100 shares are tempting, but that’s usually only the tip of the iceberg.
In the case of HSBC (LSE: HSBA) and Vodafone (LSE: VOD), I think both stocks could offer excellent passive income prospects.
Let’s dig deeper to allow me to explain!
HSBC
I don’t think HSBC needs much of an introduction. However, the investment case is a compelling one, in my view.
Three key metrics I use to value shares all tell me HSBC shares represent great value for money right now. The shares trade on a price-to-earnings ratio of seven. Next, the price-to-earnings growth and price-to-book ratios come in at close to 0.7. Remember that a reading of below one indicates value.
Moving on, a dividend yield of close to 8% is very attractive. It’s much higher than the FTSE 100 average of 3.9%. However, I do understand that dividends are never guaranteed.
HSBC’s long and storied track record of performance, growth and wide footnote are huge positives, in my eyes. I’m particularly excited about HSBC’s presence in the burgeoning Asian market. This is an area where wealth is tipped to rise, and HSBC can use its existing presence to capitalise and boost returns and earnings.
From a bearish view, I must admit the current struggles in the Chinese economy are a slight cause for concern. As one of the biggest economies in the world, and a key market for HSBC, short to medium-term issues could dent earnings and returns.
As a long-term investor myself, I’d look at the long-term picture. I reckon HSBC shares could be a savvy buy now for building wealth.
Vodafone
Similar to HSBC, Vodafone doesn’t really need much of an introduction. However, the investment case is a bit more complex, in my view.
Vodafone shares trade on a forward price-to-earnings ratio of just over 10. Next, a dividend yield of 10.7% looks attractive, at least on the surface of things. Finally, the firm’s expansion plans into growth markets such as Africa, where telecoms take-up is rising, could provide lucrative opportunities to boost earnings and growth.
It’s worth mentioning Vodafone has been undergoing some reshaping recently. The business sold its Italian and Spanish businesses for a combined €13bn to streamline operations.
However, this sale could also help tackle the mountain of debt that Vodafone has on its balance sheet. The worry for me is that debt can often take precedence over investor returns and growth plans.
In fact, Vodafone has already confirmed that it will be halving its dividend next year. Its new yield will still be higher than the FTSE 100 index average. However, this could just be the start of cuts to conserve cash and pay down debt. Time will tell.
Conversely, a bit of pain to stimulate the business and focus on growth could be a temporary blip. As I said, the Vodafone investment case isn’t as clear-cut for me personally, compared to say HSBC’s. However, there’s still lots to like, but more risks to contend with.
