Shares that offer good dividend yields are a great way to earn more returns from our investments. These additional payments are implemented by companies to reward investors for their long-term commitment.
However, while dividends are a plus, they aren’t guaranteed. If earnings fall, companies often choose to cut a dividend and reinvest into the business.
For that reason, I think it’s best to choose well-established companies that are likely to continue turning a profit.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
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HSBC Holdings
HSBC (LSE:HSBA) is the largest bank in the UK and a massive global financial powerhouse. It serves 42 million customers in 62 countries. Well-established companies with diverse global interests can make stable, long-term investments.
It currently sports an 8% dividend yield that’s predicted to grow to 8.4% in the coming years, suggesting analysts expect the company to continuing doing well. Using a discounted cash flow model, analysts estimate the bank to be undervalued by 57.4%, with a trailing price-to-earnings (P/E) ratio of 6.68.
During Covid, the share price collapsed to a low of 283p. The is indicative of the fragility of banking shares during times of crisis. However, the share price has slowly recovered, reaching a high of 654p in late 2023. It has since levelled out and is trading steadily around the 600p mark.
Double dividends
HSBC is planning a special 21p dividend for shareholders that will be paid once the sale of it’s Canadian division is finalised. Combined with the expected 61p annual payment, this would net investors an extra 82p for each £6 share held — approximately £137 on a £1,000 investment.
Keep in mind though, HSBC is a bank and therefore highly susceptible to economic instability. If current recession fears come true, loan defaults could spell trouble for the banking sector. I’m still keen to buy the shares for the dividends but at the same time, I’ll be keeping a close watch on developments in the UK economy.
Imperial Brands
With an 8.5% yield, Imperial Brands (LSE:IMB) is a stock I recently bought that’s already netted me decent gains. The UK-based tobacco company has been making steady gains for the past three years, with the share price up 30% since late February 2021.
While it lacks the same impressive growth as some other FTSE 100 companies, the stable and high dividend payments make up the slack. Growth of 48.3% over the past year has exceeded the UK tobacco industry.
A risky industry
Tobacco is a controversial industry that’s coming under increasing scrutiny. This week, the British government introduced a bill to phase out smoking among young people with an aim to improve public health.
If the bill is passed, there will be new limits imposed on the age at which consumers can purchase tobacco products. This could have significant impact on the company’s domestic sales in the long term.
But so far, the news hasn’t slowed growth.
With a trailing P/E ratio of 6.4, Imperial is estimated to be undervalued by 57.8%. At £2.3bn and £18bn respectively, earnings and revenue have increased in the past year. This led to net profit margins up 103% since 2022.
So while Imperial’s long-term prospects may be uncertain, for now things are going well.
I might even scoop up some extra shares to maximise the dividends while I can.
