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.

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.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

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

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

This FTSE 100 stock is down over 30% in 12 months! Is now a good time to buy?

Jabran Khan delves deeper into this FTSE 100 stock that has seen its share price drop substantially in the past…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

I’d buy this crashed FTSE 100 share for its near-7% dividend yield!

These five FTSE 100 shares have crashed, losing 18% to 25% of their value in one month. But I'd buy…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

How I’d invest a Stocks and Shares ISA with a 10-year time frame

Our writer explains how he focusses his Stocks and Shares investment choices by using a long-term perspective.

Read more »

UK money in a Jar on a background
Investing Articles

3 reasons to consider the 7% Legal & General dividend yield

The Legal & General dividend yield of 7% is one reason our writer would consider buying the shares for his…

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Should I buy this FTSE 250 defensive stock?

Jabran Khan is looking for defensive stock options for his holdings and delves deeper into this FTSE 250 food manufacturing…

Read more »

pink toy piggy money box on yellow background
Investing Articles

5 ‘no-brainer’ FTSE 250 shares to buy today

I'm seeing a lot of attractive dividend shares in the FTSE 250 right now. This approach gives me some very…

Read more »

Windmills for electric power production.
Investing Articles

The SSE share price slumps by 11%! Should I buy today?

The SSE share price tumbled today after talks of a windfall tax on electricity generators. Our writer considers if it’s…

Read more »

British Pennies on a Pound Note
Investing Articles

3 penny shares I own instead of Woodbois

Our writer prefers these three penny shares over hot stock Woodbois -- which is why he has bought them.

Read more »