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Given the performance of the S&P 500 over the past couple of years relative to the FTSE 100, investors on this side of the pond have been interested. That’s natural, especially as the popular theme of AI has been driven by stocks listed in the US. Yet when it comes to passive income generation, is it the same case, that I should be trying to buy US stocks for the highest potential yield?
Differing perspectives
The first way to answer the question is to look at the average dividend yield for the two leading indexes. The S&P 500’s average yield is 1.21%, and the FTSE 100’s is 3.51%. So, if I simply wanted to buy an index tracker that distributed income, I could make the argument that I should choose the UK option. If I invested £10,000, the monetary difference between the two options over the course of a year would be £230.
However, below the surface, things are more complicated. For example, a portfolio targeting the half-dozen highest-yielding options using S&P 500 stocks would yield 7.03%. For the FTSE 100, the average yield would be 8.61%. Again, the UK would be the better option if someone were trying to implement this strategy.
The movements in the share price need to be taken in account when considering dividend income. Changes in the stock price can either add to the overall profit or negatively affect the dividends. Over the last year, the FTSE 100 has been up 8.6% compared to 6.43% for the S&P 500.
So by looking at three different angles, the UK stock market seems to be more attractive. Of course, there are other ways to look at the two markets, so this isn’t a definitive answer. But I’m happy to invest predominantly this side of the pond for the dividend part of my portfolio.
UK potential
If an investor wants more exposure in this area, HSBC (LSE:HSBA) is one stock to consider. The global bank has a dividend yield of 5.76%, with the share price up 43% over the last year.
The business performed well in 2024, even against the backdrop of a decent 2023. Profit before tax rose by £1.55bn to £25.03bn, despite a decrease in the net interest margin. Reasons for the boost included higher customer activity in the Wealth Management division and more Securities Financing business. It’s true that there was a kick higher from the sale of the Canadian entity, and this was a one-time profit impact that won’t be repeated.
Finances mean that I don’t see the dividend as being under any threat for the coming year. Looking ahead, HSBC is pushing ahead with more expansion in Asia. I see this as a good move, as over half of profits for the group come from this region.
One risk is that net interest income could keep falling this year, as central banks, including the US Federal Reserve, the European Central Bank, and even the Bank of England, are expected to reduce their base rates further. Yet, with careful planning, this risk can be managed.