Buy HSBC Holdings for the Best Banking Yield

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LONDON -- Remember the good old days when investors held banking shares for their safe dividend income? The financial crash shattered that. More recently, banking stocks have been a recovery play for those investors brave enough to bet that the eurozone crisis wouldn't blow up in their faces. It's been a remarkably successful bet.

But if you're hankering for a safer play on the banking sector and yearn for those reliable dividends, it's worth having a look at HSBC  (LSE: HSBA  ) (NYSE: HSBC  ) . After recent broker upgrades, its shares are on a prospective yield of 5%, with a 4.2% historic yield in the bag. That's well ahead of Standard Chartered and Barclays, the other two dividend-paying banks. And HSBC surely has the safest dividend in the sector.

Safety in numbers
It's not just that HSBC is the second largest company on the FTSE 100, with a market cap roughly equal to the other four banks put together. HSBC's global footprint underpins its safety. With over 6,000 offices in 80 countries, its worldwide reach provides a strong competitive advantage to capture international trade flows and service multinational corporations.

Over 100 million retail and three million corporate customers give HSBC's brand defensive qualities. Each year, U.S.-based Davis Brand Capital names its top 25 global brand leaders. In a list dominated by titans such as AppleProcter and Gamble, and Coca-Cola, HSBC is just one of a handful of non-U.S. corporations.

That global spread imparts geographic diversification. Risk assets are broadly spread across Europe, Asia Pacific and the Americas. Earnings are also dispersed, though more skewed than assets and more exposed to China. Asia Pacific contributed 65% of total pre-tax profits last quarter, with 25% coming from Hong Kong alone.

HSBC's is mostly a sober, traditional sort of banking. Just over a third of profits come from its Global Banking and Markets division, and not all of that is investment banking.

A healthy 12.7% core tier one ratio also makes it one of the best capitalized banks. After the disastrous acquisition of U.S. sub-prime lender Household, a chastened management team is focusing on shareholder returns. Emerging markets, especially Latin America and Asia, should provide growth.

With HSBC's shares trading at 1.1 times net assets, it looks a good time to lock in that 5% yield.

Of course, banking might still not be your cup of tea. It hasn't proved the most reliable sector. If you're interested in a safer source of dividend income, then I recommend you look at the "Motley Fool's Top Income Stock for 2013." It describes a company yielding well over 5% and which has a policy of increasing dividends at least in line with inflation. In a sector that has good visibility of earnings, that's a great dividend to lock in. You can download the report by clicking here -- it's free.

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  • Report this Comment On June 18, 2013, at 11:48 PM, markw707 wrote:

    Yes to all of that, but there's a lingering question over HSBC's head: Is it crime and terrorism to fund crime and terrorism? As we know, HSBC was the go-to bank for Middle Eastern terrorists and Mexican Drug cartels for several years. The US DOJ said: "Kind of", and they hit HSBC with about $2B in fines and required HSBC to admit to trading with the enemy. This agreement may be favorable to HSBC, but it has not been approved by the overseeing Judge, John Gleeson. Until Judge Gleeson blesses HSBC's deal with the DOJ, we have to be concerned about HSBC's future.

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