Why Barclays PLC, HSBC Holdings plc And Lloyds Banking Group PLC Make The Perfect Income Portfolio

Barclays PLC (LON: BARC), HSBC Holdings plc (LON: HSBA) and Lloyds Banking Group PLC (LON: LLOY) are three unusual dividend picks.

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.

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.

The financial sector is usually the last place investors look when hunting for yield. Indeed, the banking sector’s average dividend yield currently stands at 3.5%, which is nothing to get excited about. The FTSE 100’s average is similar.

And apart from Asian banking giants, HSBC (LSE: HSBA) and Standard Chartered, which support dividend yields of over 5%, the majority of banks now only offer a token dividend yield.  

However, some banks, including HSBC, Barclays (LSE: BARC) and Lloyds (LSE: LLOY) have all the qualities needed to make the perfect dividend portfolio. 

Growth and income 

The best income and dividend investments have three main qualities.

  1. The dividend has room to grow.
  2. The dividend on offer is greater than inflation.
  3. The payout is sustainable in the long-term.  

HSBC’s payout meets two of these three criteria. The bank is well capitalised and the payout is well covered by earnings per share, so the dividend is sustainable.  What’s more, HSBC’s monster dividend yield of 5.4% is three times more than the current rate of inflation — 1.6% as measured by the Retail Prices Index during December 2014.

Nevertheless, HSBC’s dividend payout does not have much room for growth. The bank’s profit margins are coming under pressure from rising regulatory costs and the amount of profit available for distribution to investors is falling.    

Still, with a sustainable dividend yield of 5.4% HSBC is a solid backbone for any dividend portfolio. 

Room for growth

Lloyds is yet to reinstate dividend payments but the bank’s management is fully committed to this goal.

The bank is seeking permission from regulators to restart dividend payments again this year. If the group finally gets the go-ahead, analysts believe that the bank will pay a dividend of 2.8p per share for 2015 — a yield of 3.7%.

However, over the long-term, City experts believe that the bank will return around 70% of income to investors. If City predictions prove true and the bank does hike its payout ratio to 70%, then with earnings of 8.6p per share forecast for 2016, Lloyds’ could offer a dividend payout of 5.6p per share, a yield of around 8%.

So, Lloyds and HSBC make the perfect partnership. As HSBC’s payout stagnates, Lloyds’ hefty dividend yield and rapid payout growth will provide investors with an additional source of income. 

International

Even though Lloyds’ payout is set to grow rapidly over the next few years, over the longer term, just like HSBC, Lloyds could struggle to produce dividend growth. This is because the group does the majority of its business inside the UK and with competition increasing, Lloyds’ earnings and dividend payout cannot continue to expand rapidly forever. 

Barclays on the other hand should be able to achieve this long-term earnings and dividend growth. The bank’s international exposure, especially to Africa should enable Barclays to benefit from global economic growth and, if it does, shareholders will benefit. 

Indeed, over the next two years alone, City analysts expect the bank’s earnings to expand by 50% between 2014 and 2016. As a result of this growth, analysts expect Barclays’ dividend payout to rise to 12.2p per share by 2016, equal to a yield of 5.4% based on the current share price. 

A basket of income

Overall, Barclays, Lloyds and HSBC make the perfect income portfolio. Barclays offers long-term dividend growth. Lloyds is on target to offer a high-single-digit yield within the next few years and HSBC currently offers an attractive yield that will form a decent backbone for any portfolio.

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »