Over the previous 4 years, proudly owning shares in HSBC (LSE: HSBA) has been extremely profitable for some buyers. For one factor, the HSBC share price has gone up by an unbelievable 159% throughout that point.

Not solely that, however the FTSE 100 share at the moment affords a dividend yield of 6.4%. That’s already enticing for my part. But when I had purchased at that low level 4 years in the past, I might now be yielding over 16% yearly from this blue-chip financial institution share.

I didn’t purchase again then — however I’ve been reflecting on the HSBC share price rise and listed here are a few classes I’ve taken from it.

The market shouldn’t be essentially rational

Typically when a share price is excessive or low, it’s simple as an investor to presume that there’s good motive for it.

There’s a long-running debate about simply how nicely the inventory market values firms, pricing in all of the recognized dangers and alternatives at any given second. If the market was completely rational, for my part, it will minimize out some alternatives that become profitable for buyers.

Is HSBC actually price 159% extra as a enterprise than it was 4 years in the past?

The dangers have modified, and pandemic-era dangers have receded. However most of the fundamentals, from a robust model to a big buyer base particularly in Hong Kong, stay the identical.

So I see the surging HSBC share price as a reminder that – generally a minimum of – when a share appears low-cost it actually is low-cost. That may be true of a giant blue-chip international financial institution, not simply an obscure market minnow.

Present yield and potential yield should not the identical

Again in late 2020 HSBC, in step with different British banks, had suspended dividend funds. So, though the financial institution had beforehand been a superb dividend payer, the outlook for shareholders from a passive revenue perspective was unsure.

However the dividend got here again and, as I defined above, the potential yield for at present again in late 2020 (although it was not clear then) was approaching 17%.

That’s large. It’s a good reminder that present dividends and even dividend historical past shouldn’t be essentially a information to what’s going to occur in future. As a substitute, I attempt to deal with how a lot extra free money circulate I consider an organization will generate over the long term and the way seemingly I feel it’s to make use of that to fund dividends.

How I’ll apply these classes

Simply because the HSBC share price has soared doesn’t essentially imply it’s overvalued. Certainly, even now it trades on a price-to-earnings ratio of below 8.

However I proceed to avoid banking shares for the time being as a result of I see a threat {that a} weak economic system might harm earnings.

Nonetheless, that doesn’t imply I’ve not discovered something from HSBC’s stellar share efficiency over the previous few years. Now I hope to use these classes as I proceed to search for shares to purchase.