It’s never smart to own just one stock. Even hedge funds with the most concentrated portfolios typically hold at least three or four. And given that no dividend’s ever truly guaranteed, it’s even less desirable to have a solitary share if I’m relying on that for passive income.
But it can be a fun thought experiment to consider nonetheless. So which stock would I own for dividends if I could only invest in one for the next decade? Well, I would ordinarily say insurer Legal & General as it’s my largest dividend holding. But I’m going with banking heavyweight HSBC (LSE: HSBA). Here’s why.
A sky-high yield
A key attraction is the juicy dividend on offer. Right now, analysts expect HSBC to dish out 62 cents (48p) per share in 2025. That translates into a forecast dividend yield of 7.4%. That’s around double the FTSE 100 average.
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The company’s also buying back its own shares hand over fist. It just bought back $3bn in the second quarter, topping the $2bn worth in the first quarter. If it keeps this up, it’ll beat the $7bn spent on buybacks last year. So it would be fair to call this a ‘cannibal’ stock.
Plus, while many firms misallocate capital by buying back shares at inflated valuations, the same can’t be said for HSBC. Its shares are trading on a very cheap forward P/E ratio of 6.7.
Higher-growth opportunity
Another reason I like the stock is that I expect the bank’s strategic focus on Asia to pay off in the shape of higher earnings (and hopefully dividends) over the next decade.
It may not seem like it now with China’s sluggish economy, but Asia’s still set to enjoy rapid growth. In fact, it’s expected to contribute more than half of global GDP by 2030, making it the largest economic region in the world.
The usual suspects, China and India, are tipped to be key drivers of this growth, helping Asia’s middle class grow to over 1bn people by 2030. That’ll account for nearly two-thirds of the global middle class!
To target these growing affluent populations, HSBC is heavily investing in its wealth management and private banking services in China. It’s also expanding its retail banking operations in India.
However, where there’s potential reward there’s also risk. China’s remarkable economic ascent hasn’t gone unnoticed in Washington and there’s a risk trade wars escalate and tensions rise further.
In a worse case scenario, HSBC could be asked to pick sides or even break itself up. That would cause a lot of uncertainty and turmoil for shareholders.
I’d take the risk
Given this, I could have gone with UK-focused lender Lloyds for an easier night’s sleep. The trade-off for its arguably less risky outlook is lower growth prospects and dividend yield (5%).
However, I’d still plump for HSBC right now. The dirt cheap valuation, sky-high yield and stronger earnings potential make this my top pick.
Thankfully, this is just a thought experiment. So I get to hold HSBC inside a diversified portfolio of UK dividend stocks. And therefore sleep easier!
