I’ve been spending time looking at ways to establish a passive income. I’m into the idea of using top stocks to set myself up for financial independence in the future.
There’s one top UK stock that has a 7% dividend yield right now. I did my research to see if it’s a candidate for my passive income project.
Top bank stock with a 7% dividend yield
HSBC (LSE: HSBA) is one I’ve got my eye on. It ticks a lot of the boxes for me. It’s the largest Europe-based bank by total assets with £3trn as of March 2023.
Competitive positioning is a big deal in the banking sector. After all, pricing and relationships are vital for attracting and retaining customers.
The HSBC share price is up 5% this year to 664.3p, giving the bank a £123bn market capitalisation. Given that I’m looking for a long-term dividend stock for passive income, I’m leaning more towards scale and stability.
Despite reasonable capital gains in recent years, HSBC shares are still yielding over 7%. That’s pretty handy when we consider the FTSE 100 average is 3.6% right now.
Of course, relying on a single metric like dividend yield can be misleading. Another key ratio to consider when investing in bank shares is the price-to-book (P/B) ratio. This measures the market value of the company against the value of its net assets on the balance sheet.
HSBC trades at 0.84, while NatWest and Lloyds trade at 0.77 and 0.79, respectively. That makes HSBC slightly more expensive than its UK banking peers on a relative value basis. Long-term investors like me need to decide if that premium is justified.
Why I like it
One of the things I like is the bank’s global reach and market positioning versus its UK-listed peers. It’s a financial powerhouse with a strong presence across global markets, including Asia.
I see Asia as a potentially lucrative market. This is largely due to its forecast population growth and an expanding middle class ready to fuel economic growth. A trusted brand with a robust network like HSBC’s could really benefit from Asia’s expected rise by 2050.
The bank also has a strong track record of paying out earnings. In fact, last year it nearly doubled its payout from 31 cents in 2022 to 61 cents per share. That’s good news for investors like me seeking to build a passive income.
What are the risks?
I see a few risks around it as a dividend stock. For one thing, a falling cash rate could mean banks race to lower rates to keep customer deposits. This could boost competition and reduce the spread between what HSBC can borrow from depositors and lend to customers, called the net interest margin. I see this as a key potential risk for the bank’s free cash flow in the medium term.
Additionally, the bank’s global presence could be a double-edged sword. After all, the Chinese economy has been less stable of late. More volatility driven by its Asian operations could threaten earnings and my passive income potential.
It means HSBC is one that I’m not quite ready to buy. However, if I see its relative value fall in line with its peers, I’ll be ready to snap up some shares.
