If you want healthy dividend income, there are two things that matter. The most obvious is the current dividend yield paid by a share, and the higher the better. But over the long term, if the annual cash handout does not rise at least in line with inflation each year, your real income will fall.
So you can actually do a lot better with a lower initial yield, but from a dividend that is rising ahead of inflation.
You might not think a bank is the kind of company to have been providing exactly that for the past five years, but take a look at these dividend figures from HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US):
| Year | Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 36c | 3.3% | 2.03x | +5.9% |
| 2011 | 41c | 5.0% | 2.24x | +13.9% |
| 2012 | 44c | 4.2% | 1.64x | +9.8% |
| 2013 | 49c | 4.4% | 1.71x | +8.9% |
| 2014* |
52c | 4.9% | 1.73x | +6.1% |
| 2015* |
57c | 5.3% | 1.73x | +9.6% |
* forecast
Dividend growth
Those figures show a winning combination of high yield and annual rises that are running way ahead of inflation — although before we get too excited, 2010’s dividend of 36 cents per share was the result of two years of hefty dividend cuts as HSBC was hit by the financial crisis along with the rest.
But from there, dividends have been recovering strongly. And at first-half time this year, chief executive Stuart Gulliver told us that the bank’s “…continuing ability to generate capital supports both growth and our progressive dividend policy“, so it sounds like HSBC has placed a high priority on keeping those above-inflation dividend rises going.
Price slump
The HSBC share price has been in a bit of a slump over the past year, and by the beginning of June was down around 15%. That was due to fears of a Chinese slowdown as the country’s property market was booming and debt was spiraling, at a time when the government is trying to shift the economy more towards private business and away from government developments.
The slide hit Standard Chartered too, which also does the bulk of its business in the Chinese sphere.
But those fears have been subsiding over the past month, with Chinese growth coming in very close to the government’s target of 7.5% per year, and the two banks are seeing their shares recover a little.
The HSBC price is up 10% since July’s low, although Standard Chartered has only managed a 2% recovery in the same period.
A tempting prospect
With HSBC shares on a forward P/E of 12.2 this year, dropping to a 11.3 based on 2015 forecasts, and that progressive dividend policy in place, they’re looking like a good bet for long-term appreciating dividends — with some price growth potential thrown in as a bonus.