How Lloyds Banking Group PLC Could Be A Better Dividend Stock Than National Grid plc

Here’s why income-seeking investors may prefer to buy Lloyds Banking Group PLC (LON: LLOY) over National Grid plc (LON: NG).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

On the face of it, National Grid (LSE: NG) (NYSE: NGG.US) is a far more appealing income stock than Lloyds (LSE: LLOY) (NYSE: LYG.US). That’s because it currently yields 5.1%, while Lloyds has only just recommenced the payment of dividends and is expected to yield around 3.5% in the coming year.

However, delving deeper than just the headline yield shows that, in the long run, you may receive a higher income from shares in Lloyds than from holding a stake in National Grid. Here’s why.

Profitability

While Lloyds has endured a hugely challenging period in recent years, with the credit crunch causing its bottom line to plunge to major losses, its future looks set to be extremely profitable. Certainly, there remain a number of problems that Lloyds and its sector peers will need to overcome, notably regulatory issues, PPI claims and a slow-growing Eurozone, but things really do seem to be on the up for Lloyds.

Furthermore, the bank is still targeting the payment of around 50% of earnings as a dividend and, in the long run, Lloyds’ payout ratio could rise to the 65% figure that its CEO is believed to be aiming for. As such, Lloyds is expected to yield 5.2% in 2016 from a payout ratio of 50%, which is exactly the same as National Grid is forecast to yield in the 2016 calendar year. As a result, following their difference in yield in the current year, the two stocks are tied when it comes to which is the higher income payer in 2016.

Looking Ahead

However, where Lloyds could surpass National Grid with regard to dividend payments is in terms of its future prospects. Finally, the ECB has decided to undertake a quantitative easing programme and, while it may not prove to be a ‘silver bullet’, it could mean that the growth prospects for the UK and global economies improve significantly. This would mean higher asset prices, higher demand for new loans and fewer bad loans moving forward – all of which would bolster Lloyds’ profitability. And, with its commitment to paying 50%+ of profit as a dividend, shareholders would be beneficiaries of any improved performance.

On the other hand, National Grid’s profit growth prospects are somewhat limited. Certainly, it has the potential to keep up with the wider market’s growth rate but, realistically, regulatory involvement and rising interest rates (which will cause its debt to become more expensive to service) could cause its bottom line to rise at a more modest pace than that of Lloyds.

So, while their headline yields currently differ and National Grid rightly has a reputation as a top income stock, Lloyds could prove to be an even better investment when it comes to dividends.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Lloyds Banking Group and National Grid. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Abstract bull climbing indicators on stock chart
Investing Articles

Could the Chancellor’s Leeds Reforms trigger a bull market for UK stocks?

More competitive lending and greater interest in shares could help kick start growth for UK businesses. But could it also…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I think this AI stock could double before Palantir

Palantir stock is up almost 100% this year. As a result, it now sports a market cap of $350bn meaning…

Read more »

Elevated view over city of London skyline
Investing Articles

As the FTSE 100 hits an all-time high, is it time to reconsider the S&P 500?

Christopher Ruane explains why a surging FTSE 100 has not yet made him focus more on the potential of S&P…

Read more »

GSK scientist holding lab syringe
Investing Articles

The FTSE 100 sits at a record high. But some stocks still look dirt cheap!

The usually sluggish FTSE 100 is having a surprisingly good year. But our writer feels there are still potential bargains…

Read more »

Close-up of British bank notes
Investing Articles

With a £20k Stocks and Shares ISA, here are 3 ways an investor could target a £2k annual passive income

Our writer thinks there is more than one way to try and skin a cat when it comes to earning…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Up 350% in 3 years but my favourite FTSE growth share is still on a low P/E of just 10!

Harvey Jones can't tear his eyes away from this former penny stock turned growth share superpower. But can it carry…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Up 83% in months, could Micron stock be the next Nvidia?

Chipmaker Micron Technology's stock price has surged by over 80% in just a few months. Could this be a possible…

Read more »

Tesla car at super charger station
US Stock

£1k invested in Tesla stock at the start of the year is currently worth…

Jon Smith reveals the performance of Tesla stock in 2025 and explains why he doesn't believe the move lower is…

Read more »