I love dividend shares. They offer the chance to make extra cash by doing little to no work. For me, that’s ideal.
Most of the shares in my portfolio that offer a meaty yield reside on the FTSE 100 or FTSE 250. Both indexes are home to many great companies that have strong and stable cash flows. As such, these companies are often willing to offer dividends that are generous and growing.
Right now, I see an array of brilliant income shares out there. Even better, a lot of them look dirt cheap. I’m rushing to buy them. Let me explain why.
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The power of compounding
I target dividend shares because it allows me to benefit from compounding. Any dividends that I receive, I reinvest back into buying more shares of the company. By doing this, it essentially means that I earn interest on my interest. The more I do this, the quicker my pot grows.
I buy for the long term. That’s at least 10 years and ideally, it’s a lot longer than that. The stock market has proved over and over again that investing for the long run is the most efficient way to benefit from it. By buying dividend shares, I plan to speed up the process of building wealth.
Warren Buffett once pinpointed the power of compound interest as a main catalyst in his wealth creation. If it’s good enough for Buffett, then it’s most certainly good enough for me.
Value to be had
It’s all well and good for me to say this. But it’s time I put my money where my mouth is. What sort of income shares am I eyeing?
I like the look of HSBC (LSE: HSBA). As I write, it yields 5.5%. That’s above the FTSE 100 average of around 4%.
The stock looks incredibly cheap, trading on a price-to-earnings ratio of just five. That’s some way off its five-year average of around 13. It’s also below the ‘value’ benchmark of 10.
Of course, HSBC’s tempting price doesn’t come without risks. Firstly, there are concerns surrounding the poor performance of UK banks in recent times. We saw Jeremy Hunt request a sit-down with top banking executives a few weeks back to address this issue.
On top of that, its exposure to Asia, and more specifically China, is also a concern given ongoing geopolitical issues and a weak Chinese property market. The firm generated a quarter of its revenues from mainland China last year.
But even so, I’m not too worried about that. It’s an issue that’ll impact the stock in the short term. But in the years to come, and as the Chinese economy continues to grow, fuelled by things such as a rising middle class, I’d expect HSBC’s focus on the region to bear fruit. It has earmarked over $6bn for investment in Asia to 2025.
I’ve had HSBC on my watchlist for a while. I suspect it won’t be too long before I decide to open a position with some investable cash.
