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Why HSBC is an overlooked FTSE 100 dividend share I’d buy and hold forever

In the last three months, the FTSE 100 has gained around 7% as investor sentiment towards a variety of shares has improved. Although the HSBC (LSE: HSBA) share price has risen during that time, it is up by a comparatively disappointing amount. It has gained 3% in the last three months, with investors seeming to prefer other large-caps at the present time.

However, the income potential of the bank remains strong. Alongside an improving strategy, this could make it a worthwhile investment opportunity. It could be worth buying alongside a FTSE 250 income stock which reported positive results on Monday.

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Improving outlook

The last few years have represented a period of change for HSBC. The company has come under a significant amount of criticism from investors for its somewhat mixed financial performance. One problem it has faced is high costs at a time when many of its industry peers have been able to put measures in place such as headcount reduction in order to make their businesses more efficient.

In response, the company has decided to invest more heavily in faster-growing regions within its portfolio. As a result, it is seeking to focus a greater amount of capital across Asia, where the growth potential within the banking sector seems to be high. This could lead to a higher growth rate for the bank and may provide it with a competitive advantage versus industry peers who are focused on slower-growth markets.

Income potential

Of course, the banking sector may not be viewed as a sound place for income investors to buy shares. The financial crisis may be nearly a decade ago, but the uncertainty which it brought means that some investors may feel the chances of dividends being paid is lower than for other industries.

However, in the case of HSBC, its 5.3% dividend appears to be highly sustainable. Not only does the company have the potential to generate impressive earnings growth in future following its decision to focus on fast-growing Asia, its dividend is also due to be covered 1.4 times by profit in the current year. And with its shares trading on a price-to-earnings (P/E) ratio of 15, there seems to be further upside potential ahead for the long term.

Improving prospects

Also offering improving income prospects is FTSE 250-listed property investment company Palace Capital (LSE: PCA). It reported improving full-year results on Monday which showed that it was able to make progress with its strategy.

For example, during the year it was able to acquire its largest purchase to date. The RT Warren Portfolio helped to boost the company’s valuation to over £275m, while profit before tax moved 6% higher. This was boosted by a rise in net rental income of 22% to £14.9m, while revaluation gains and profit on disposals also made a positive impact on profitability.

With dividends rising by 3% versus the prior year, Palace Capital’s 5.5% dividend yield appears to be highly attractive. It is covered 1.1 times by adjusted profit, which suggests that it is sustainable. As a result, the stock could offer income investing potential over the long run, with a price-to-book (P/B) ratio of 0.8 indicating that it offers a wide margin of safety.

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Peter Stephens owns shares of 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.