The FTSE 100 index is full of high-yield dividend stocks. But not all are worth buying – many have been poor long-term investments.
Below, I’m going to highlight my top pick among the Footsie’s 20 highest yielders. Here’s why I think this stock is worth considering for a portfolio today.
An attractive long-term outlook
Of the 20 highest yielders in the FTSE 100 today, my favourite stock is banking giant HSBC (LSE: HSBA). It currently has a dividend yield of around 6.4%.
There are several reasons I’m bullish on this particular stock. It’s not just the attractive yield that stands out to me.
One is that the company has genuine long-term growth potential. With its focus on Asia and wealth management, this bank has the potential to get much bigger over the next decade.
It’s worth noting that long-term growth potential is often overlooked by dividend investors (who can get caught up in high yields). It’s really important, however.
Typically, business growth leads to higher earnings. And this supports dividends for investors (and often leads to increased payouts).
In recent years, we’ve seen many high yielders cut their dividends due to a lack of growth. Some examples here include BP and Imperial Brands.
Secure dividends
Another reason I like the look of the stock is that the dividend appears to be secure.
This year, analysts expect total dividend payments of 67 cents per share from HSBC. Meanwhile, they expect the bank to generate earnings per share of 133 cents.
That gives us a dividend coverage ratio (earnings per share divided by dividends per share) of about two. That’s a solid ratio and indicates that earnings should comfortably cover dividends.
I’ll point that not many high yielders in the FTSE 100 currently have this level of coverage. Right now, Legal & General has a dividend coverage ratio of just 1.1 while Taylor Wimpey has a ratio of 0.95 (a ratio under one is a red flag as it shows that earnings are not covering dividends).
There are always risks
Of course, dividends are never guaranteed. And we can’t rule out a scenario in which HSBC reduces its payout to investors in the future.
After all, banking is a cyclical industry (meaning that it has its ups and downs). In the future, a major global recession (or more isolated economic weakness) could lead to lower earnings for the group and lower dividends.
And that’s not the only risk to consider with this stock. While Asia and wealth management appear to offer potential for growth, the banking industry is at risk of disruption.
Today, digital banks and FinTech start-ups are aggressively trying to capture market share from legacy banks. So HSBC will have to innovate and ensure that it can offer customers a first-class digital experience.
Worth a look
Overall though, I think this stock – which trades on a price-to-earnings (P/E) ratio of just eight – looks attractive today. With its long-term growth potential and its 6.4% yield, I believe it’s worth considering.
This post was originally published on Motley Fool
