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HSBC yields 6.9%! Why I’d still buy this fast-growth bank instead

If little green men came down from Mars to take a look at the FTSE 100, they might be confused as to why HSBC (LSE:HSCA) gets far fewer investing headlines than rivals like Lloyds or Barclays.

After all, the big bank has long been one of the FTSE 100’s largest dividend payers, second only to Shell for the last five years.

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And for income investors or those nearing retirement, being able to rely on regular dividend payouts is paramount. HSBC reports earnings and pays out dividends in US dollars, so the weakness of sterling has seriously boosted its numbers in recent years.

All in on divis

Until the financial crisis of 2007–08 HSBC’s dividend growth topped more than 10% a year.

Two bad years saw dividends plummet by 29% and 39%. From 2015 to 2018 full-year dividends have been stuck at $0.51 per share with no dividend growth at all. And yet at current count the £115bn banking giant pays out a whopping 6.9% yield.

That figure has been aided by the fact that since a January 2018 peak the share price has been dropping steadily. It has lost 15% of its value in the last six months, and is trading around the 560p mark as I write. The shares are now trading for a low earnings multiple of 11.7, which is cheap by anyone’s metric.

Over the last five years HSBC’s earnings per share have fallen by around 5% a year, which isn’t the end of the world by any means. However nearly 80% of profits were paid out as dividends in the last 12 months, up from 73% the year before. Dividend cover moved back into the black in 2018, but only just, at 1.2 times earnings, so there is little room for manoeuvre here if earnings don’t improve.

Secure, trust me

An alternative option for those seeking strong dividends with better growth could be AIM-listed £295m market cap retail bank Secure Trust Bank (LSE:STB).

The Solihull-based group focus on savings, loans to real estate developers, and, through its V12 and Moneyway brands, car finance for the automotive sector.

A 5.3% dividend yield certainly looks attractive, especially on a price-to-earnings ratio of 9.8, and further good news is that between 2017 and 2018 pre-tax profits climbed from £25m to £34.7m. Earnings per share over the same period leapt 39% from 116.4p to 161.8p. City analysts believe EPS here has the potential to skyrocket to 241p by 2021, too.

STB pays out around 51% of its earnings as dividends, which in comparison with HSBC appears more sustainable for the longer term.

I also like the fact that Secure shareholders have not had their holdings diluted by large share issues, which can be a problem in the AIM market where companies need to continually raise funds to stay afloat.

Chief executive Paul Lynam told investors full-year results this time around would be in line with expectations and the bank was looking forward with “cautious optimism” given its “strong new business pipelines, healthy capital and liquidity positions“.

Institutions and public companies currently make up 94% of shareholders. I’d suggest becoming part of the 6% of private investors to take a stake in STB would be a sound move.

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Tom Rodgers has no position in the shares mentioned. 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.