The total dividend yield from HSBC (LSE: HSBA) shares in 2024 is currently 7.6%. This is based on regular dividend payments of 66 cents (51p) plus a special dividend award of 21 cents, totalling 87 cents.
Without the special dividend included, the yield is 5.8%, and analysts forecast this will stay the same in 2025.
I have long held shares in the bank for two key reasons. First, I expect its share price to keep rising due to what I believe is a major undervaluation of the stock.
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And second, I receive significant passive income from the relatively high yield it generates. This is money made with little effort on my part, most notably in my view from share dividends.
How much passive income could be made?
A common misconception about investing is that a lot of money is needed to start the ball rolling. This is not true at all, as even £5 a day saved and invested can produce extraordinary returns over time.
This amount (equating to £150 a month) invested in HSBC at 5.8% would generate £6,434 of dividends after 10 years. On the same average yield, these dividends would increase to £91,736 after 30 years.
Adding in the deposits made over the period and the total holding would be worth £145,735 by then. And this would pay £8,453 a year in passive income from HSBC dividends by that point.
That said, it is important to know that these figures are based on the dividends being reinvested into the stock each year. This is a standard investment practice known as ‘dividend compounding’. It has a multiplier effect on the value of the dividends like that seen with interest left to accrue in a bank account.
It should also be noted that yields can change, depending on moves in the share price and annual dividend amounts.
In HSBC’s case, analysts forecast the dividend will rise to a sterling equivalent of 55.2p in 2026 and to 60.2p in 2027. These would give respective yields of 6.2% and 6.8% over those years, based on the current £8.82 share price.
Is the potential share price bonus still in play too?
HSBC shares continue to look extremely undervalued to me. This increases the chance of making a profit on the share price if I ever sell them.
More specifically, a discounted cash flow analysis shows the stock is 46% under its fair value at its current £8.85.
Therefore, the fair value for the shares is £16.33, although market forces could move them lower or higher.
A risk to this valuation is declining interest rates in its key markets.
However, the bank has increasingly substituted fee-based for interest-based business. And its 2024 results saw profit before tax rise 6.5% year on year to $32.309bn. This outstripped analysts’ forecasts of $31.67bn.
I am extremely happy with my HSBC holding, which I bought at an average price below its current level. However, even if I did not have this I would have no hesitation in buying the stock now, given its high yield and significant undervaluation to its fair value.
