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For investors, unlike stock repurchases, dividends are guaranteed to return capital to their pockets. What’s more, if dividends are dished out by solid companies, the payments often grow steadily over time. As an added bonus, dividend income in Hong Kong is tax-free which means investors get to keep every cent that is paid out.
When it comes to which dividend stock to buy, many shareholders consider a stock’s dividend yield, payout ratio, dividend growth history, and future potential, among other factors. In this article, I’ll analyse the top five-yielding stocks on the Hang Seng Index, which consists of some of Hong Kong’s largest listed companies.
China Petroleum & Chemical Corp (SEHK:386), otherwise known as Sinopec, is one of China’s largest state-owned integrated oil companies and accounts for around 60-70% of China’s crude imports. Sinopec is also the Hang Seng’s highest-yielding stock with a yearly dividend per share (DPS) payout of HK$0.478 and a current yield of slightly over 10%.
Due to its scale and government regulations, Sinopec has a wide moat. Given the slowing Chinese economy and the rapidly fluctuating oil prices, however, I believe the stock’s dividend is riskier than the dividend of other stocks listed on the Hang Seng.
Sino Land Co Ltd (SEHK:83) develops office, residential, retail and industrial properties – primarily in Hong Kong. It currently pays a DPS of HK$0.98 and has a yield of 8.6%. Due to its focus on Hong Kong, the stock is less affected by the recent RMB depreciation.
For it to be a reliable dividend stock, Sino Land will need a growing economy and stable political environment in its home base. There is room for growth in its dividend as Sino Land’s dividend payout ratio is around 45%.
Bank of China Ltd (SEHK:3988) is one of China’s “big four” state-owned banks. It is also the highest-yielding bank listed on the Hang Seng, with a DPS of HK$0.21 and current yield of almost 7%. Due to the slowing Chinese economy and recent RMB depreciation, Bank of China’s earnings might not be as strong as expected.
Bank of China will also need to compete against future foreign banks who enter China and ensure responsible lending of loans in a potentially more challenging macro economy. By being state-owned, Bank of China may also grant loans that help the Chinese economy but would not necessarily be in the best interests of shareholders.
China Shenhua Energy Co Ltd (SEHK:1088) is a state-owned coal producer. Although coal is more polluting than natural gas or green energy, China still relies on the energy source for the majority of its electricity generation. As a result, China Shenhua is profitable and pays an annual dividend of HK$1.0 per share and yields around 6.8%.
Although HSBC Holdings plc (SEHK:5) is commonly referred to as Europe’s largest bank by assets with over 2.23 trillion euros on its balance sheet at the end of last year, the reality is that HSBC has always been an Asian-centered bank.
The bank, which also goes by the name Hongkong and Shanghai Banking Corporation, gets the majority of its adjusted profit before tax from Asia – home to many of the world’s fastest-growing economies. Recently for the second quarter of 2019, HSBC reported profit attributable to ordinary shareholders of US$4.4 billion, up around 7% from the same period last year.
The near term might be a little challenging due to the trade war (as well as CEO John Flint stepping down). HSBC Holdings currently pays a dividend of HK$4.0 per share, giving it a yield of around 6.6%. HSBC’s dividend has been rather stable (but not growing) for the past five years.
Banking on yield
In many cases, high yields do not necessarily mean a stock is a reliable investment so this is something investors should be aware of. However, of the five stocks, HSBC would be my pick for the best dividend stock.
Although it doesn’t have as high of a yield as the other four, and its payout ratio is rather high at 81%, it is a privately-run company versus those which are state-owned enterprises such as Sinopec, China Shenhua or Bank of China.
HSBC also doesn’t have as much exposure to Hong Kong as Sino Land (as a percentage of overall profits). If the protests in Hong Kong get worse, the economy of Hong Kong might not do as well as hoped. While its near-term is challenging due to the trade tensions between the US and China, it is controlling costs by laying off some of its workers.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.