Home » Investing Articles » £10,000 in savings? Here’s how I’d aim to turn that into £642 a month of passive income!
Life-enhancing passive income can be made by buying high-quality, high-yielding shares, especially if the dividends are used to buy more stock.
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Simon Watkins
After graduating from Oxford University with BA (Hons) and MA (Hons) degrees, Simon Watkins worked for several years as a Forex trader and salesman, becoming Head of Forex Institutional Sales for Credit Lyonnais, and then Director of Forex at Bank of Montreal.
He then became a financial journalist, including positions as Head of Weekly Publications, Managing Editor and Chief Writer of Business Monitor International, Head of Global Fuel Oil Products for Platts, and Global Managing Editor of Research and Vice President of Renaissance Capital investment bank in Moscow.
He has written extensively on the oil market and other commodities markets, Forex, equities, bonds, economics and geopolitics for many publications, including The Financial Times, Euromoney, Financial Times Capital Insights, OilPrice, NewsBase, Risk.net, and FTSE Global Markets.
In addition, he has worked as an investment and risk consultant for major hedge funds in London, New York, Moscow, and Dubai, and regularly appears as an oil and financial markets expert on various international television networks, including the BBC, and Al Jazeera.
Simon has also written eight best-selling books on the global financial markets and financial markets trading, all of which are available from Amazon, Apple, Kobo, Barnes & Noble, and Blackwells, among others.
Latest posts by Simon Watkins (see all)
- Following a spike after its H1 results, Rolls-Royce’s share price has dipped 11%, so should I buy? - 6 August, 2024
- £10,000 in savings? Here’s how I’d aim to turn that into £642 a month of passive income! - 6 August, 2024
- £11,000 invested in this FTSE 100 high-yield gem can make me £10,918 each year in passive income! - 5 August, 2024
Published
| More on: HSBA
HSBC (LSE: HSBA) remains a core holding in my ‘passive income’ portfolio, designed to maximise my returns from dividend stocks.
Aside from choosing the shares to invest in and monitoring their progress, no other effort is required on my part – hence the ‘passive’ label.
The first quality I want in my passive income stocks is a high dividend yield. HSBC paid out 61 cents (48p) a share last year, yielding 7.7% currently. This compares very favourably to the FTSE 100’s present average of 3.6%, so one box ticked for me.
The second thing I look for is the shares to be undervalued against their peers. This reduces the chance of my dividends being erased by extended share price losses.
A discounted cash flowanalysis shows HSBC’s shares to be 62% undervalued at their present price of £6.25. Therefore, a fair value would be £16.45. They may go lower or higher than that, but to me it is another box ticked.
The final factor I require is good business growth prospects, as this powers dividends over the long term. Analysts estimate that HSBC’s revenue will grow 5.1% a year to end-2026. The final box ticked, as far as I am concerned.
How much passive income can it generate?
A share’s yield changes as its price moves and as its dividend payments change. Currently HSBC pays 7.7% a year, but analysts forecast this will rise to 9.7% by the end of this year.
However, there are risks in the business, as in all firms. The main one I see for the bank is that the margin it makes between deposits and loans shrinks in line with falling UK interest rates.
That said, in its H1 2024 interim results released on 31 July, HSBC’s pre-tax profit fell just 0.4% to $21.6bn. This was better than consensus analysts’ expectations of $20.5bn. Additionally positive was the $0.4bn increase in revenue compared to H1 2023.
It also pledged a $3bn share buyback, with such programmes tending to support share prices. And it paid a second interim dividend of 10 cents. This followed the same amount paid at the end of Q1 and a special dividend of 21 cents announced on 30 April.
Using the lower yield of 7.7%, £10,000 of HSBC shares would generate £770 in dividends in the first year.
Over 10 years, an extra £7,700 would be made, provided the yield averaged the same. Over 30 years on the same basis, this would total £23,100.
Turbocharging the dividend returns
This all assumes that the dividend payments are withdrawn each year and spent on something else.
Crucially though, if they were used to buy more HSBC shares instead, the gains could be much, much more.
Doing just this (‘dividend compounding’ as it is called) would make an extra £11,545 after 10 years instead of £7,700.
After 30 years of reinvesting the dividends, an additional £90,004 of passive income would have been generated rather than £23,100.
The total investment pot of £100,004 would pay £7,700 a year in dividend payments, or £642 every month!
Assuming inflation over the periods, the buying power of the income would be reduced, of course. However, it underlines how much passive income can be made from much smaller investments over time.