Are Dividends At GlaxoSmithKline plc (7%), Pearson plc (6.9%) & HSBC Holdings plc (6.4%) For Real?

Will GlaxoSmithKline plc (LON: GSK), Pearson plc (LON: PSON) and HSBC Holdings plc (LON: HSBA) stump up the cash?

| 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.

I’m a big fan of investing for dividends, and high yields are the order of the day. But some yields can seem too good to be true, and I’m looking at three big ones today.

GlaxoSmithKline (LSE: GSK) shelled out for a yield of 5.8% in 2015, and current City expectations suggest shareholders will enjoy 7% for the year just ended, on a share price of 1,337p. The trouble is, the predicted 92p would not be covered by earnings of 76p per share and that’s not a recipe for sustainability — and there’s already a drop to 82p (still a handsome 6.2% yield) forecast for 2016.

But Glaxo’s dividends might well hold out because of the reason for its falling earnings, and that’s the expiry of some key patents over the past couple of years and a need to strengthen the firm’s drug development pipeline. There have definitely been some encouraging trial results coming through over the past 12 months, and in outlining its R&D portfolio in November Glaxo claimed that “40 potential new medicines and vaccines offer significant opportunity to drive long-term performance“.

Should you invest £1,000 in Barclays 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 Barclays made the list?

See the 6 stocks

There’s a return to earnings growth on the cards for 2016, so could GlaxoSmithKline really be a good long-term income investment? I think it could.

Publishing rut

Educational publisher Pearson (LSE: PON) has seen its shares hammered by more than 50% since a high in March 2015, to 698p today. But one upside is that it’s pushed the expected 2015 dividend yield up to 6.9%. And what’s more, it would be covered around 1.3 times by predicted earnings. But having said that, we’re still way behind the two-times cover we were seeing before the falls in EPS of the past few years, and I’m not sure Pearson will want to keep handing over cash at such a relatively low cover level for much longer.

At Q3 time, Pearson reported a reasonable performance, but warned that markets are still quite tough and cyclical issues were yet to improve. But even if the firm is facing another couple of fairly flat years, a P/E of under 11 could still look attractive if it can can keep its dividend payments going throughout the lean spell.

A high-yield bank

My third is HSBC Holdings (LSE: HSBA), the bank that has been hit due to its connections with China. HSBC’s shares are down 15% over 12 months to 499p, and down 25% over two years.

But we’re looking at a bank that has a nicely progressive dividend policy, upping its annual cash payout ahead of inflation most years. The City’s analysts are calling a 6.4% yield for 2015, with about the same to follow in 2016, and the dividends would be covered approximately 1.6 times and 1.5 times respectively. That level of cover is not as high as we expect in the longer term from the likes of Barclays and Lloyds Banking Group, so I think we’d need to see some earnings growth in the next few years for the cash to be sustained.

The big unknown for HSBC right now, of course, is the extent of its exposure to possible bad debt in China should that country’s financial systems start to unravel in any way approaching the recent Western meltdown.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays, GlaxoSmithKline, and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »