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I love dividend stocks. They offer the opportunity to earn extra money by doing little or no work. For me that is ideal.
Most of the stocks in my portfolio that offer substantial returns reside in the FTSE 100 either FTSE 250. Both indices are home to many excellent companies that have strong and stable cash flows. As such, these companies are often willing to offer generous and growing dividends.
Right now, I see a variety of brilliant income shares. Even better, many of them look very cheap. I rush to buy them. Let me explain why.
The power of capitalization
I target dividend stocks because they allow me to benefit from compounding. All the dividends I receive I reinvest in purchasing more shares of the company. By doing this, it basically means that I earn interest on my interest. The more I do this, the faster my pot grows.
I buy for the long term. That's at least 10 years and ideally, much longer than that. The stock market has proven time and time again that investing for the long term is the most effective way to profit from it. By purchasing dividend stocks, I plan to accelerate the wealth creation process.
Warren Buffett once pointed to the power of compound interest as the primary catalyst for his wealth creation. If it's good enough for Buffett, then it certainly is good enough for me.
Value that can be had
It's very good for me to say this. But it's time I put my money where my mouth is. What type of revenue sharing am I considering?
I like the look of HSBC (LSE: HSBA). As I write, it yields 5.5%. That's above the FTSE 100 average of around 4%.
The stock looks incredibly cheap, trading with a price-to-earnings ratio of just five. That's some way off its five-year average of about 13. It's also below the “value” benchmark of 10.
Of course, HSBC's tempting price is not without risk. Firstly, there are concerns around the poor performance of UK banks in recent times. We saw Jeremy Hunt request a meeting with senior banking executives a few weeks ago to address this issue.
On top of that, its exposure to Asia, and more specifically China, is also a cause for concern, given the current geopolitical issues and the weak Chinese real estate market. The company generated a quarter of its revenue in mainland China last year.
But still, that doesn't worry me too much. It is a problem that will affect the stock in the short term. But in the coming years, as China's economy continues to grow, fueled by things like a rising middle class, I would expect HSBC's focus on the region to bear fruit. It has allocated more than $6 billion for investments in Asia through 2025.
I've had HSBC on my watch list for a while. I suspect it won't be long before I decide to open a position with some cash to invest.
