Here’s how investors could consider aiming for £3,449 in annual passive income from £10,000 of HSBC shares

Relatively small investments in high-yielding shares can grow into big passive income, especially if the dividends are reinvested in the stocks.

| 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.

Passive income text with pin graph chart on business table

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.

Making money from financial investments is the truest form of passive income there is, in my view. Passive income means earnings generated with minimal effort, such as with dividends from shares or interest from bonds.

The only real effort involved is picking the right share or bond in the first place and then monitoring its progress periodically.

Much excitement has been seen recently from a spike in UK government bond yields. Those yields have jumped to around 4.7% on the benchmark 10-year bond, known as the ‘risk-free rate’.

Should you invest £1,000 in Barclays 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 Barclays made the list?

See the 6 stocks

As I have large holdings of these, I am as happy as the next bondholder. However, this does not mean that I will be moving all my money currently in stocks into these.

Shares chosen for their passive income potential can generate much greater returns than UK government bonds even now.

Three qualities I want in passive income stocks

The first thing I want in passive income stocks is a yield significantly higher than the 10-year UK government bond. As a stock’s yield moves in the opposite direction to its price, this will change frequently.

The second quality I look for is that a share seems very undervalued to me. This reduces the chance of my making a loss on the stock should I ever wish to sell it. This would effectively diminish the overall passive income I had made on the share.

And the third element I require is that the business is strong enough to keep paying the high dividends.

A prime example of these factors at play

On the first element, I bought HSBC (LSE: HSBA) shares when they yielded well over 7%. As the share price has soared since then, the yield has gone down to 5.9% now. That said, this has been more than compensated for by gains in the stock price if I wished to sell them.

On the second, a discounted cash flow analysis shows the shares are technically 55% undervalued, even after their rise. Given their present £8.24 price, the fair value for them would be £18.31. Market vagaries might push them lower or higher than that, but they still look full of value to me.

Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALL21 Jan 202021 Jan 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024www.fool.co.uk

And finally on business strength, a risk is that the recent decline in UK interest rates will reduce its net interest income. This is the difference between a bank’s income from interest charged on loans and paid out on deposits.

However, HSBC has shifted its strategy from interest-based to fee-based income. This resulted in Q3’s pre-tax profit rising 9.9% to $8.48bn (£6.95bn), way ahead of analysts’ consensus of $7.6bn.

How much passive income can be made?

Investors considering a £10,000 stake in HSBC would make £8,014 in dividends after 10 years. And after 30 years, this would have risen to £48,454.

By then, the total HSBC holding would be worth £58,454, which would pay an annual passive income of £3,449.

This is based on ‘dividend compounding’ being used and on an average 5.9% yield over the periods. Analysts forecast the yield will rise to 6.7% in 2025, 6.9% in 2026, and 7% in 2027 but there is no guarantee it will.

Given that all three factors that led me to buy in the first place are still in play, I will be buying more HSBC shares very soon.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

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

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

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

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »