Why I’d buy Lloyds Banking Group plc for its dividend over Barclays plc

Edward Sheldon compares Lloyds Banking Group plc’s (LON: LLOY) dividend prospects to those of Barclays plc (LON: BARC).

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Lloyds Banking Group (LSE: LLOY) and Barclays (LSE: BARC) are two of the UK’s most popular stocks. However, if I had buy one of those stocks for its dividend, Lloyds would be my choice. Here’s why.

Big dividends on the way?

Lloyds is a stock I’m watching with interest right now. I don’t yet own shares in the bank, but after reinstating its dividend in FY2014, and lifting its payout considerably over the last three years, Lloyds is beginning to look very attractive from a dividend perspective.

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Over the last three years, Lloyds has paid dividends of 0.75p, 2.25p and 2.55p, as well as rewarding shareholders with special dividends of 0.5p in each of the last two years. Looking at projections for this year’s dividend, City analysts currently anticipate a payout of 4p for FY2017, equating to a generous yield of 5.8% at the current share price. Looking further ahead to FY2018 dividend forecasts, analysts anticipate a payout of 4.48p next year, equating to a formidable yield of 6.5%. Can Lloyds deliver on these forecasts?

The bank reported Q3 results during the week, and it was refreshing to see that there were no major surprises. I was particularly interested to learn that there was no further provisions for PPI charges, as these charges have significantly reduced profitability in recent years. Chief Executive Antonio Horta-Osorio stated that the bank had delivered a “strong financial performance,” with “significant improvement in returns and strong capital generation.”

Of course, the investment case for Lloyds isn’t risk free. As a UK-focused bank, its fortunes are linked to the performance of the UK economy. If Britain was to suffer an economic downturn or a property market collapse, profitability could be significantly affected, and that could have implications for the dividend. However, for now, I am bullish on the dividend prospects.

Underwhelming dividend

In contrast to Lloyds, Barclays’ dividend prospects look quite underwhelming in my view.

It cut its dividend significantly last year to 3p per share, and this year analysts expect a dividend payout of 3.05p, or a yield of just 1.7% at the current share price. While the payout is expected to pick up considerably next year to 6.7p per share, a yield of 3.7%, that is significantly below Lloyds’ forecast payout.

Whereas Lloyds appears to have considerable momentum at present, the outlook for Barclays appears more opaque, in my view. Q3 results released this week revealed a significant drop in the firm’s investment banking arm, and with 20 separate investigations into the business ongoing, litigation remains a risk.

Barclays currently trades on a forward P/E ratio of 10.3, vs 8.9 for its sector peer, and with that in mind, given the stronger momentum of Lloyds, the Black Horse appears to be the better dividend stock of the two banks right now, in my opinion.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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