HSBC (LSE: HSBA) shares paid a total dividend in 2023 of 61 cents, fixed back then at 49p. On the current share price of £7.21, this generates a yield of 6.8%.
That is nearly double the FTSE 100’s average return of 3.5% and more than twice the FTSE 250’s 3.3%.
How much passive income can be made?
Passive income is money made from minimal effort, most notably in my view from dividends paid by stocks.
£11,000 (the average UK savings) would buy me an additional 1,525 HSBC shares. In the first year, these would pay me £748 in dividends. On the same average yield, this would increase to £7,480 after 10 years and to £22,440 after 30 years.
However, my returns would be vastly greater if I used the dividends paid to buy more of the stock. This is called ‘dividend compounding’ and is the method I usually employ to dramatically increase my passive income.
Doing this on the same average 6.8% yield would lift the dividend payments to £10,671 after 10 years, not £7,480. And after 30 years on the same basis, these would jump to £73,111, not £22,440.
The total value of my HSBC shares then (including the initial £11,000 investment) would be £84,111. This would pay me £5,720 in annual passive income or £477 each month!
Is the high yield sustainable?
HSBC’s Q3 results released on 29 October showed a business well capable of maintaining a high yield, in my view.
The key drag – and the principal risk going forward – was declining net interest income (NII). This is what a bank makes on the difference in interest charged on loans it makes to that which it pays on deposits.
The bank’s NII dropped $1.6bn (£1.2bn) in Q3 from the same period last year to $7.63bn.
However, its ongoing strategic shift from interest-based to fee-based income resulted in a pre-tax profit $0.76bn higher than in Q3 2023.
This was driven by a 47% jump in its Global Banking & Markets division, to a pre-tax profit of $1.849bn. Another of its big fee-based businesses, Wealth & Personal Banking, saw a 16% rise to $3.23bn from $2.78bn in Q3 2023.
These numbers enabled the bank to pay a third interim dividend of 10 cents, in line with last year. Given the 21-cent special dividend previously announced, analysts forecast a final 2024 yield of around 9.3%, depending on the share price. This is because yields have an inverse relationship to share prices.
Will I buy the stock?
I focus on stocks that generate a 7%+ annual return, as I want to maximise my passive income.
I bought HSBC shares some time ago at a lower level when they were yielding more than my minimum requirement. However, although the shares are marginally under my 7%+ minimum now, I am gaining on the price rise.
Additionally, I believe the bank’s strategic rebalancing more towards fee-based income will continue to yield good results. This should drive the share price and dividend higher over time. So, I will buy more of the shares very soon.
The post I’d buy 1,525 HSBC shares to generate £5,720 a year in passive income appeared first on The Motley Fool UK.
Should you invest £1,000 in HSBC right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?
See the 6 stocks
More reading
With a P/E of 7.5 and a 6.8% yield, are HSBC shares a steal?
4 stocks that Fools own for passive income
If I put £20,000 into the FTSE 100, how much passive income would I get?
Reasons to consider buying HSBC shares right now
Up 67% over 3 years, but can the HSBC share price keep climbing?
Simon Watkins has positions in 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.
