Passive income is the primary goal for many investors, myself included. I’m always on the hunt for stocks that could help me enhance the yield on my portfolio.
And when prices go down, I’m very interested. That’s because share prices and dividend yields are inversely correlated. When share prices fall — assuming dividend payments remain constant — dividend yields go up.
March wasn’t a great month for the majority of UK listed stocks, but it was particularly bad for banking stocks. So, today I’m looking at this area of the market.
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Can banking stocks supercharge my passive income generation?
Market correction
March’s correction was triggered by a banking crisis in the US. Tech financier Silicon Valley Bank had to sell bonds at a loss when depositors wanted their money back. These bonds were sold at a loss because bond prices and bond yields are inversely related — and central bank rates have been pushing upwards.
Investors then grew worried about unrealised bond losses elsewhere in the sector. But a month later, it appears that these fears were unwarranted. Most banks, notably European banks, have strong liquidity, there is no concern about capital flight, and most bonds will be held until maturity — not sold.
Why I’m buying
Some blue-chip banking stocks saw as much as 20% wiped off their share prices over the past month. This is a huge amount of money. Notable losers included Barclays, HSBC, and Standard Chartered. All three fell by more than 20%.
Standard Chartered isn’t a big dividend payer, but with the share price falling from around 800p in February to 600p today, the dividend yield has pushed upwards to 2.5%. That’s not bad considering the bank’s main offering to shareholders is growth.
But Barclays and HSBC now offer dividend yields above 5%. That’s sizeable. And I appreciate banks are cyclical stocks, but big banks do offer more stability than several other sectors.
It’s also important to remember that the dividend yield I receive is always relevant to the share price I pay for the stock.
My top picks
I’m actually focusing on the hardest hit part of the market. I like Barclays for its 5.1% dividend yield, and HSBC for its 5% yield.
But bank stocks across the sector have been impacted by the sell-off. My preference is towards consumer banks and specifically those that have more exposure to central bank rate rises.
Lloyds shares have fallen 9% over the past month — down 6% over a year. That’s less than other banks have fallen, but the dividend yield has still risen accordingly and is now sitting at 5.2%. The forward dividend is also very attractive, pushing up towards 6.5% in 2024.
The very high interest rates we’re seeing now aren’t ideal for banks. That’s because very high rates can see good debt turn bad. But the forecast sees rates moving lower from here, and I like that.
I’ve actually topped up on all these banks, including Standard Chartered, as the share prices slumped. Collectively, these purchases should enhance my passive income generation, and provide some growth.
