There's no doubt that HSBC's dividend yield of 6.3% catches the eye as it's the highest yield among the UK banks and one of the highest yields in the FTSE 100 index. But high yields can be dangerous and often indicate that a dividend cut may be on the horizon. So the question to ask in regards to HSBC is whether the high yield is sustainable?
One of the first things a dividend investor should do is take the time to investigate the company's dividend policy. Here's a statement taken from HSBC's website: "In the current uncertain environment we plan to sustain the dividend at its current level for the foreseeable future. Growing our dividend in the future depends on the overall profitability of the Group, delivering further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner."
So HSBC plans to continue paying 51 cents per year for the foreseeable future. Is this realistic? Take a look at the table below.
Earnings per share
Dividend per share
The table shows that 2016 was a poor year for HSBC with profitability dropping significantly. As a result, the bank's dividend cover - a metric used to judge a dividend's sustainability - looks dangerously low at 0.14, indicating that the dividend might not be safe.
So for me, from a dividend investing perspective, HSBC should be approached with caution. The headline yield looks attractive, especially in the current low rate environment, but I'd be looking for a boost in profitability before committing to the bank for its dividend.
Rival Barclays is in a different position to HSBC in that it has already cut its dividend, announcing in March last year that the payout for 2016 would be slashed by more than half. 2016's dividend of just 3p per share leaves Barclays' yield at an underwhelming 1.4%, a level which is unlikely to appeal to most income investors.
Barclays is currently undergoing a significant restructuring, dumping non-core assets with the intention of creating a "simplified transatlantic, consumer, corporate and investment bank." The key question for income hunters is whether the new-look Barclays will be capable of increasing its dividend payout in the future. City analysts certainly think so, with consensus dividend estimates for FY2018 sitting at a high 8.1p, however, to my mind, those estimates look a little optimistic.
If Barclays can register an improved financial performance, I would not be surprised to see a small dividend hike in 2018. But for now, with the yield sitting at a low 1.4%, I believe there are better dividends on offer elsewhere.
Five dividend stocks we like more than HSBC and Barclays
Analysts at The Motley Fool recently published the exclusive wealth management report called Five stocks to retire on.
And while I can't reveal the names of the five companies here, I can tell you that neither HSBC or Barclays made the cut.
However if you'd like to find out the names of these five high-quality dividend stocks, you can download a FREE copy of the report, within seconds right here.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.