HSBC shares yield 5.5%. Are they worth buying?

Jon Smith explains why the dividend outlook for HSBC shares has improved, and what this could mean for income investors now.

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In recent months, momentum has been building behind international banking giant HSBC (LSE:HSBA). Positive quarterly results from earlier this month meant it announced the first quarterly dividend since 2019 of $0.10 per share.

HSBC shares have also been pushing higher, reflected in the 25% gain over the past year. Most of this has come over the past six months. So is there a compelling case to jump onboard and buy the stock now?

Dividends look to be back on the menu

To understand why the stock has become more appealing recently for dividend hunters, we need to go back to 2018/2019. Before the pandemic, the bank was in the habit of paying out four dividends a year. For example, in 2018 this consisted of three $0.10 payments and a larger $0.21 one.

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Due to the pandemic, this frequency and size was cut. For 2021 and 2022, the dividends were made up of two payments. In comparison to the total figure of $0.51 from 2018, the size of dividends has also been much smaller. The 2021 total payment was $0.25, followed by $0.32 last year.

The resumption of a $0.10 quarterly payment will lead some to conclude that payments are now going to be coming back more frequently and include a larger annual figure.

This is backed up by financial performance. Incredibly, Q1 revenue jumped 64% versus the same quarter last year to $20.2bn. Granted, some of this was to do with transactions relating to France and the UK. But a good portion was relating to higher net interest income, benefiting from higher interest rates.

How the current yield compares

Using the current GBP/USD exchange rate, the £0.34 per share total payment over the past year provides a current dividend yield of 5.51%.

The FTSE 100 average yield is 3.7%. From this, it’s clear the HSBC yield is attractive for an income investor.

What about when comparing it to peers in the banking sector? Again it scores well. It’s the highest yielding bank in the index, followed by Lloyds Banking Group (5.11%) and NatWest Group (4.97%).

What makes the yield even more impressive is that the share price has been rallying too. When a share price increases, the dividend yield usually decreases. This is because the dividend per share becomes a smaller portion of the share price.

Having the complete picture

Investors do need to be aware of some risks. The recent purchase of SVB UK is something I’ll be keeping a close eye on. In fact, it’s already being sued for $1bn on claims that it’s plundering staff from the company.

Another concern is the exposure the bank has to the retail market. If we do have a recession in the UK or other parts of the world, the loan defaults could hit the bank hard.

Even with these risks, I feel investors should consider buying HSBC shares for income potential both now and in the years to come.

Created with Highcharts 11.4.3HSBC Holdings PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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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.

Jonathan Smith has no position in any share mentioned. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. 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.

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