I’m always searching for reliable dividend stocks to help me reach my dream of a lucrative second income. By the time I retire, I want to feel secure in the knowledge that I have enough cash when I need it.
By investing my savings into dividend-paying stocks today, I might be able to build towards that dream. But I need to find shares in companies I can rely on to keep performing well — otherwise it could all be for nothing.
This is what I’m looking at today.
A solid UK bank stock
I think HSBC (LSE: HSBA) is the most promising UK bank stock right now. With a 7.2% yield and a forward price-to-earnings (P/E) ratio of 6.9, it has both value and growth potential. It’s also very well-established, with a £121bn market cap and a customer base spanning 60 countries.
Growth-wise, it’s no Rolls-Royce but its price history looks less volatile. This makes it a more reliable — if somewhat boring — income earner.
The stock price is up 75% over the past three years, representing an annualised return of around 20% per year. I wouldn’t expect that level of growth to continue indefinitely but I think a 10% average is plausible. This a common average return that many UK investors achieve with a well-diversified portfolio of growth and income stocks.
With just less than £20,000 in savings, I could buy 3,000 HSBC shares. With dividends reinvested, the compounding returns could grow to £465,000 in 20 years, paying annual dividends worth £28,500.
Is 10% annual growth optimistic? Possibly. What if the price only grew at 5% per year on average? That would take an extra seven years for me to reach my goal. That’s still more than enough time for me to build up my second income before retirement!
Risks
I’m aware that there are some concerns regarding HSBC’s high exposure to the Asian market. The increasing likelihood of trade disagreements between China and the US could risk an economic slowdown in this region, which could hurt HSBC’s share price.
Subsequently, some analysts are forecasting a potential dip in earnings for HSBC in the short term. If the trade issues cause serious trouble, the bank may even consider a dividend cut.
On the plus side, it recently sold off its Canadian business and as such, should have some spare cash on hand. That might help it to shore up dividends until earnings improve. Its track record suggests a commitment to avoiding dividend cuts or reductions whenever possible.
Mixing things up
Diversification is often considered one of the key principles of investing, especially for beginners. By adding a few different stocks to an income portfolio, it helps to reduce exposure to sector-specific risks.
I think HSBC is a great stock but is by no means the only option I’ve looked into. I also like a few other dividend stocks with similar yields, such as Aviva and ITV. Both have enjoyed decent gains this year and are tipped for further growth. With these stocks in the mix, I could still aim for similar average returns.
This post was originally published on Motley Fool
