£5,000 in savings? Here’s how investors can consider using that to target £2,272 a year of passive income from HSBC shares!

HSBC shares deliver an excellent yield, look undervalued on key measures I trust most, and the banking business seems set for strong growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA) shares are a key holding in my passive income portfolio, comprised of high-yield stocks. I aim to increasingly live off the dividends they pay and reduce my working commitments.

I have built up my stake in the bank in increments of £5,000 over more than a year. Investors considering using the same amount to generate passive income from the stock would make £325 in passive income in the first year. This is based on the 6.5% current yield, derived from last year’s 49p dividend and the present £7.58 share price.

If the yield averaged the same over 10 years, this would rise to £3,250 and to £9,750 after 30 years.

Should you invest £1,000 in Vistry right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vistry made the list?

See the 6 stocks

Turbocharging those dividends

These payouts are clearly better than can be had from standard UK savings accounts. However, they can be much more if the dividends are used to buy more HSBC shares.

This is a standard investment practice known as ‘dividend compounding’ and is the same idea as leaving interest to grow in a bank account.

Doing this, the same 6.5% average yield would generate £4,561 in dividends after 10 years instead of £3,250. And after 30 years on the same basis, this would jump to £29,959 rather than £9,750.  

Adding in the original £5,000 investment and the holding could be worth £34,959 by then, although this is by no means guaranteed as there can be stumbling blocks along the way. On the same 6.5% yield, this would pay £2,272 a year in passive income.

How does the share valuation look?

I only buy stocks that look undervalued compared to competitors. This decreases the chance my dividend gains will be reduced by share price losses if I ever sell a stock.

In HSBC’s case, it looks cheap on the key price-to-earnings (P/E) stock valuation measure at 7.5. This compares to the average of 7.8 for its competitor group.

To work out how undervalued it is in share price terms, I ran a discounted cash flow (DCF) analysis. This shows HSBC shares as 55% undervalued at their present £7.58 price.

So a fair value for them would be £16.84. The market is an unpredictable place, so they may go lower or higher than that. However, the DCF valuation underlines to me the under-pricing suggested in HSBC’s P/E number.

Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALL18 Dec 201918 Dec 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Will I buy more shares?

A key risk for the bank’s business is that its profit margins contract as interest rates fall in some of its major markets.

That said, analysts forecast that with the special dividend announced this year the yield will rise to 9.3%. In 2025 it is projected to come down again to 6.8%, and in 2026 to rise slightly to 7%. These are all acceptable returns as far as I am concerned.

I also think the share price will stay on its recent positive trajectory. Some of this could result from the $3bn (£2.35bn) share buyback announced after its Q3 results.

But some should come from the very strong results themselves, in my view. Pre-tax profit rose 9.9% to $8.48bn, way ahead of analysts’ consensus of $7.6bn. Revenue also improved — by 5.2% — to $17bn from $16.16bn.

In sum, although I am happy with the size of my current holding in HSBC, I may well buy more in the not-too-distant future.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

UK stocks are still where the discounts are! Here’s what I’m buying

As the stock market sells off after the latest tariff news, UK stocks are still cheap compared to their US…

Read more »

Investing Articles

How much passive income could an investor earn if they put £200 a month in an ISA?

Millions of Britons use the Stocks and Shares ISA as a vehicle to build a large pot of money and…

Read more »

Investing Articles

2 ‘safe-haven’ defensive shares to consider buying as tariffs hammer the stock market

Inflation fears are sending the prices of shares down, creating potential buying opportunities for investors. But which ones are likely…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Forecast: here’s how far the S&P 500 could crash in 2025

S&P 500 stocks are getting sold off as investors panic over economic uncertainty. But how far could the index fall?…

Read more »

Investing Articles

Is the FTSE 250 about to surge by 45%?!

The FTSE 250’s trading at a massive discount versus historical levels. Could the underappreciated growth index enjoy an upward correction…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Forecast: here’s how high can the FTSE 100 could climb in 2025

The FTSE 100’s already up over 6% since the start of the year as consumer spending starts to rise, but…

Read more »

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »