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The UK's main stock index is packed with exceptional stocks that provide passive dividends. Many FTSE 100 stocks are mature, highly cash-generating entities with diverse income streams, qualities that give them the means and confidence to pay large dividends year after year.
Today, Footsie's forward dividend yield stands at 3.8%. But there are literally dozens of stocks that offer better performance than this.
Among all these attractive investment opportunities, one is especially attractive to me right now. Let's take a closer look.
A banking giant
Focused on Asia HSBC Holdings (LSE:HSBA) is by far the most powerful banking stock in London. With a market capitalization of over £118 billion, the total value of its outstanding ordinary shares is almost four times that of the second place. Lloyds Banking Group.
Unlike its FTSE 100 peer, HSBC has a broad geographical presence with operations in all four corners of the world. More recently, it has chosen to sell assets in mature markets (such as France and Canada) as it pivots to fast-growing Asian markets.
The company's dividends fell sharply following the Covid-19 outbreak in 2020. But shareholder rewards have risen sharply since then as profits have recovered. Annual pay rose 28% last year.
A passive income of £2k
With a 10.3% return by 2024, investors will need to spend just over £19,400 on HSBC shares to generate a passive income stream of £2,000.
Of course, not everyone has this amount of money on hand to spend. Investing such a considerable sum is especially difficult today, as the cost of living crisis is constantly undermining people's savings.
However, investing consistently over time means that even cash-strapped people could earn this level of second income.
At the current share price of 612p, buying 20 HSBC shares a week, or 87 shares a month (worth £532) would unlock that magical second £2k income in just over three years.
Why you would buy HSBC shares
That assumes that payments to shareholders meet the City's forecasts for next year and remain at that level in the short term. Bank stock dividends can fall when economic conditions worsen and profits come under pressure.
However, I think HSBC could deliver healthy dividend growth through 2027 and beyond. I expect profits to rise steadily as demand for banking products grows in its Asian markets.
I am also confident that the bank's strong balance sheet will help it pay increasing dividends over the next three years. Its Common Equity Tier 1 (CET1) capital rose by an impressive 14.9% in September.
Illustrating its financial strength, HSBC in October announced plans to buy back another $3 billion in shares, bringing the total buybacks in 2023 to $7 billion.
Dividends can never be guaranteed. And problems with its cost-cutting plans, combined with a new economic crisis, could hamper payments to shareholders here.
But overall I think HSBC stock is a great buy for passive income next year and beyond. I would buy it if I had money to spare.
