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High perfomance FTSE 100 Index stocks are tempting, but that's often just the tip of the iceberg.
In the case of HSBC Bank (LSE: HSBA) and Vodafone (LSE:VOD), I think both stocks could offer excellent passive income prospects.
Let's dig deeper so we can explain!
HSBC Bank
I don't think HSBC needs much of an introduction, but I think its investment case is compelling.
Three key indicators that I use to value stocks tell me that HSBC stock represents an excellent price-to-earnings ratio right now. The stock is trading on a price-to-earnings ratio of seven. Next, the price-to-growth and price-to-book ratios are both close to 0.7. Remember that a reading below one indicates value.
Moving on, a dividend yield of close to 8% is very attractive. It is much higher than the FTSE 100 average of 3.9%. However, I understand that dividends are never guaranteed.
In my view, HSBC's long track record of performance, growth and broad presence are very positive aspects. I am particularly excited about HSBC's presence in the burgeoning Asian market. This is an area where wealth is set to grow and HSBC can use its existing presence to capitalise and increase returns and profits.
From a bearish perspective, I must admit that the current difficulties of the Chinese economy are a cause for mild concern. As one of the largest economies in the world and a key market for HSBC, short- and medium-term problems could weigh on earnings and returns.
As a long-term investor, I would look at the long-term outlook. I believe HSBC shares could be a good buy now to build wealth.
Vodafone
Like HSBC, Vodafone needs little introduction, but the investment case is a little more complex in my view.
Vodafone shares trade on a forward price-to-earnings ratio of just over 10. Moreover, a dividend yield of 10.7% looks attractive, at least at first glance. Finally, the company’s expansion plans in growing markets such as Africa, where telecom adoption is increasing, could provide lucrative opportunities to boost earnings and growth.
It is worth mentioning that Vodafone has been undergoing a restructuring process recently. The company sold its Italian and Spanish businesses for a total of 13 billion euros in order to streamline its operations.
However, this sale could also help to tackle the mountain of debt that Vodafone has on its balance sheet. What worries me is that debt can often take precedence over investor returns and growth plans.
In fact, Vodafone has already confirmed that it will halve its dividend next year. Its new yield will still be higher than the FTSE 100 average. However, this could just be the start of cuts to conserve cash and pay down debt. Time will tell.
On the contrary, a small effort to stimulate the business and focus on growth could be a temporary setback. As I said, for me personally, the investment case for Vodafone is not as clear-cut as, say, HSBC's. However, there is still a lot to like, but there are more risks to be faced.
