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Why HSBC Holdings plc’s Dividend Could Be At Risk, While Barclays PLC’s And Lloyds Banking Group PLC’s Look Solid

If you look at the headline figures, you could be forgiven for thinking that FTSE 100 banking dividends are much of a muchness.

The annual yield at HSBC Holdings (LSE: HSBA)(NYSE: HSBC.US) has been holding up and is forecast to provide 5.6% this year and 5.8% next, which is about the best there is amongst the banks. But at Barclays (LSE: BARC)(NYSE: BCS) the cash has been recovering well and should yield around 4% by 2016, and we should even seen the bailed-out Lloyds Banking Group (LSE: LLOY) storm back to a predicted 4.8% yield the same year.

What lurks beneath

On that score we’re seeing some convergence, but scratch the surface a little and things soon start to look different. Just look at dividend cover for a start — Barclays’ 2016 dividend should be covered about 2.7 times by forecast earnings, with Lloyd’s 2016 payout a bit more than twice covered despite its rapid rise. But at HSBC, the City is expecting cover of only 1.6 times.

Now that’s not too bad in its own, as a healthy bank with a good future can easily maintain modestly covered dividends for a few years if necessary, but the future for these three banks do not look to be going in the same direction.

Liquidity at Lloyds has improved dramatically and the bank really does look to be out of the woods in terms of bad debts and costs. And while Barclays has continued to face a few hurdles related to misbehavour (including fines for its part in fiddling the Libor rate), it too is seeing its performance figures steadily improving.

A struggling bank

But look at HSBC. Some of its pre-crisis acquisitions turned out badly, although it wasn’t the only bank to make mistakes there. But it’s gone on to face money-laundering accusations, and is also up against allegations that its Swiss bank was encouraging its wealthy clients to evade tax.

HSBC is still struggling to control costs, is laying off thousands of employees and is dumping assets. In short, it really is just a holding company that owns lots of worldwide banks, and it doesn’t seem to be adding any synergistic benefits that would make it any more than the sum of its parts. Add to that that the company’s home market of China is in a stock market bubble akin to the dot com days in the west, which is sure to burst some time, and HSBC doesn’t look like a solid long-term income investment any more.

Biggest isn’t always best

No, when I’m looking for dividends, I’d always go for a sustainably progressive one ahead of today’s best short-term yield.

Even if HSBC looks a bit risky, contributions from FTSE 100 bank dividends can form part of a strategy that is bringing in great long-term rewards for thousands of investors.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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.