Here’s how investors can think of aiming for £3,449 in annual income from £10,000 of HSBC shares

Making money from investments is the most authentic form of income there is, in my opinion. Passive income refers to income earned with little effort, such as dividends from stocks or interest from bonds.

The only real effort involved is to pick the right stock or bond in the first place and monitor its performance from time to time.

There has been a lot of interest recently in rising UK government bond yields. Those yields fell to around 4.7% on the 10-year average bond, known as the ‘risk-free rate’.

Since I have a bunch of these, I’m as excited as the next bond holder. However, this does not mean that I will move all my money from stocks to these.

Shares chosen for their income potential can deliver far greater returns than UK government bonds even now.

Three qualities I look for in an income stock

The first thing I look for in an income stock is a much higher yield than the 10 year UK government bond. As a stock’s yield moves in the opposite direction of its value, this will change frequently.

The second quality I look for is that the assignment seems irrelevant to me. This reduces the chance of my losing the stock if I wish to sell it. This would effectively reduce all the income I had made from the share.

And the third thing I need is for the business to be strong enough to continue paying high dividends.

A prime example of these features are played

On the first element, I bought HSBC (LSE: HSBA) shares there yielded more than 7%. As the share price has risen since then, the yield has fallen to 5.9% now. That said, this has been more than compensated for by the gains in the stock price if I wish to sell it.

Second, the discounted cash flow analysis shows that the shares are technically undervalued by 55%, even after their rise. Given their current price of £8.24, the fair value for them would be £18.31. The market caps may be lower or higher than that, but they still look overvalued to me.

And finally on the strength of the business, the risk is that the recent decline in UK interest rates will reduce its net profit. This is the difference between the bank’s income from interest charged on loans and deposits.

However, HSBC has changed its strategy from profit-based to income-based. This led to Q3 pre-tax profit rising 9.9% to $8.48bn (£6.95bn), ahead of analysts’ consensus of $7.6bn.

How much income can be made?

Investors considering a £10,000 share in HSBC could make £8,014 in dividends after 10 years. And after 30 years, this would rise to £48,454.

At that point, HSBC’s net worth would be £58,454, which would pay an annual income of £3,449.

This is based on ‘dividend compounding’ applied and an average yield of 5.9% over the periods. Analysts predict that the yield will rise to 6.7% in 2025, 6.9% in 2026, and 7% in 2027 but there is no certainty that it will rise.

Given that all three of my original purchases are still in play, I will be buying more HSBC shares in the near future.