It’s that time of year again when investors are in search of the best way to make the most of their tax allowance. Over the short term, holding stocks and shares in your ISA is riskier than cash, but if you go about it the right way — investing in solid companies that pay solid dividends — then you can seriously improve your wealth.
HSBC (LSE: HSBA) (NYSE: HSBC.US), I believe, is one such ‘solid’ company — while it’s nonetheless best to diversify into a range of blue-chips instead of going for a single large holding.
I’ll explain why.
A blue-chip heavyweight
One thing you need to consider is the kind of markets you want exposure to. Despite the recent exodus and panic surrounding emerging markets, it’s worth some consideration to giving a company like HSBC — which does most of its business in Asia — a look.
The bank was relatively untouched by the financial crisis, owing to where it does its business. It cut its dividend in 2009 but it still gave a yield of 3%, which is around what the FTSE 100 averages today.
In many ways, it’s almost a textbook income stock owing to its stability, its ability to generate profits and its huge dividend yield (6% is forecast for 2015).
What’s more, the given that sentiment is against emerging markets right now, it’s an opportunity to pick up a top blue-chip like HSBC at a discounted price:
| 2008-09 | 2009-10 | 2010-11 | 2011-12 | 20012-13 | |
|---|---|---|---|---|---|
| Dividend | $0.34 | $0.36 | $0.41 | $0.45 | $0.49 |
| Profit | $7bn | $19bn | $22bn | $21bn | $23bn |
This is the kind of investment you should be looking at for your ISA, and, again, what I mean by a solid company. Notice how its dividend is steadily rising in concert with improving profits.
While HSBC’s profits may have missed analyst expectations this year, falling under by about $2bn, there was still much to like in its performance.
Indeed, operating profit increased 10% to £20bn ahead of £17bn the year before, which I’ll take given that a cost-cutting drive is still ongoing.
The firm will become leaner, with better potential for growth, and the progressive dividend policy is backed up by strong capital generation.
ISA mistakes to avoid
Now, say you invested £1,000 in a an average savings account ten years ago, what you’d have now is a little over £1,100 to show for it. Investing in the FTSE All-Share index ten years ago would have left you with £2,200. Accounting for inflation, by leaving your savings in cash you’re almost guaranteed to lose money — it’s an opportunity wasted.
Of course, investing in a single stock like HSBC has its own risks. You don’t want to be entirely reliant on the fortune of a single investment, and that’s why you need to diversify and spread the risk across a range of companies.
But HSBC recently posted its highest profits since the financial crisis and its strong capital position means its dividend is safe. It’s cheap, on a forward P/E of 10, and that dividend is one of the largest on the FTSE 100.
Whether you have faith that the world is rebalancing towards large developing economies like China — you’re free to disagree — I believe HSBC offers tremendous value.
