HSBC Holdings plc isn’t the only 5%+ yielder I’d buy today

G A Chester discusses mighty dividend stock HSBC Holdings plc (LON:HSBA) and a small-cap high-yielder you may not have considered.

| 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.

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) is a true giant of the banking world. It ranks only behind Shell in the FTSE 100 and with a market cap of over £150bn, is bigger than Lloyds, Royal Bank of Scotland and Barclays combined. If I had to buy one Footsie bank and hold it forever, HSBC would be my pick.

The main reason I’d plump for HSBC is its geographic diversification, which is far more extensive than Barclays (over 80% of income from just the UK and US). And of course, UK-focused Lloyds and RBS. This diversification means it doesn’t have single-country risk. If one country is in a recession or depression, there are likely to be others elsewhere in the world that are thriving. This gives it a level of stability over the long term, while it also benefits from exposure to faster-growing emerging markets.

Growth and income

Ten years on from the financial crisis, HSBC is now looking set for sustainable revenue growth and with operating costs projected to fall, for strong profit growth too. City analysts are forecasting earnings per share (EPS) of $0.60 for 2017 when it reports its results on 20 February, followed by 17% growth to $0.70 for 2018. This supports expected dividends of $0.51 and $0.52.

At a share price of 760p the forward price-to-earnings (P/E) ratio is 15, which looks undemanding in view of the forecast 17% earnings growth, while a 5% dividend yield only adds to the appeal. As such, HSBC is not only my top Footsie banking pick for its geographical diversification and long-term growth and income prospects, but also a stock I’d buy today due to what I see as its attractive valuation.

Bargain basement rating

Performance materials specialist Low & Bonar (LSE: LWB) may be a far smaller company than HSBC but, like the banking colossus, it has wide geographic diversification. Only Germany (17%) contributes more than 10% to group revenue and the UK contributes less than 5%. Also like HSBC, its profits are rising and its dividend yield is high.

The company today released results for its financial year ended 30 November. The shares are up 11% to 60p, valuing the business at around £200m. Revenue of £446m (up 12% on last year) and underlying EPS of 6.42p (up 7% thanks to favourable exchange rates) both came in slightly ahead of forecasts. The P/E is in the bargain basement at 9.3, while a 3.05p dividend gives a running yield of 5.1%.

Why such a cheap valuation?

Performance was mixed from Low & Bonar’s four divisions and included a hefty crash in profit from one of them and some under-performance within parts of another. One-off non-cash impairments actually pushed the group into a loss on a statutory basis. However, the company, which also announced the appointment of a new permanent chief executive today, laid out the problem areas and its strategy to remedy them with admirable transparency and detail.

The overhaul will be quite extensive but the plan, which includes reducing relatively high net debt of £138m by at least £15m this year, looks eminently credible. With management also having maintained the dividend as a reflection of its confidence, I see Low & Bonar as an attractive value play and on this basis I rate the stock a ‘buy’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Royal Dutch Shell B. 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

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

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »