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Top UK stocks: I’d buy these two bank shares in August

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On Friday, the FTSE 100 index hit a day high of 7,224.46 points — its highest since Covid-19 sent share prices plunging in spring 2020. This left the Footsie almost 765 points ahead in 2021, up 10.6%. But when I view top UK stocks today — including some mega-cap companies — I see bargains everywhere. Indeed, when compared with other indices, the FTSE 100 seems cheap in historical terms. Thus, here are two Footsie stocks I’d buy for their potential for growth and dividend increases.

Top UK stocks: #1 Barclays

One great argument in investing is: which is better, dividends or growth? Personally, I like to combine both. I use cash dividends from shares to generate an increasing passive income over time. Also, I look to rising share prices to increase the value of my family portfolio. Hence, my top UK stocks are those that provide both types of gain. And when I review the FTSE 100, I see plenty of shares with potential for future profitability. In particular, I’m drawn to banking, where household-name stocks still trade at fair values.

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For example, I like Big Five bank Barclays (LSE: BARC), whose shares closed at 185.1p on Friday. This valued the bank at £31.4bn, making it a heavyweight among top UK stocks. The Barclays share price hit its 2021 intra-day high of 190.58p on 29 Apr. But it fell back to close at 159.32p on 19 July. Since then, BARC has staged a recovery, bouncing back by 16.2%. But if the UK economy continues to grow strongly and we get Covid-19 largely under control, I can see more gains from this top UK stock. Of course, that’s a big ‘but’.

I don’t own Barclays stock at present. But I’m attracted to both its large UK lending base and its profitable investment-banking operations. Also, as a veteran value investor, I see this share as too cheap. Barclays trades on a price-to-earnings ratio of 7 and an earnings yield of 14.3%. Also, the dividend yield of 1.6% a year is likely to rise, given the regulator has removed restrictions on UK bank dividends. If all goes well in global capital markets and consumer lending, then this top UK stock looks too cheap to me.

I also like the look of Lloyds

Lloyds Banking Group (LSE: LLOY) is another large UK bank I’m keen on. Lloyds is so large and has so many big brands that it has a relationship with most of the UK’s 27m households. In September, the Lloyds share price was crushed below 24p. At that time, I said that “I see a lifetime of value in Lloyds”. On Friday, this top UK stock closed at 46.25p, having reached its 2021 closing peak of 50p on 2 June.

At its current price, Lloyds’ market value is £32.8bn. This price includes the UK’s large mortgage book in a booming housing market — surely a highly valuable asset. Also, many of the bank’s metrics — such as return on equity and balance-sheet strength — are going in the right direction. Yet LLOY trades on a price-to-earnings ratio of 7.1 and an earnings yield of 14.1%. The modest dividend yield of 2.7% could rise as the UK economy recovers. To me, Lloyds looks like a value stock I’d like to own if Covid-19 disappears.

But if consumers and businesses start to struggle, then I’d beware, as bank stocks might take another dive!

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Cliffdarcy has no position in any of the 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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