Doubling my money? With Lloyds (LSE: LLOY) shares, I’ve achieved pretty much the opposite. Since I bought, the share price has just about halved. My dividends have provided some compensation for that, mind.
But what are my chances of doubling my money in Lloyds starting from today’s valuation? I think they’re pretty good, and I’ll tell you why.
Since the pandemic crash, Lloyds has reinstated its dividend. It’s not at levels it has been in the past, but forecasts suggest a yield of 5.2% for 2022. Analysts see that rising in the next two years too. Of course, forecasts can change!
But even if the dividend remains fixed at this year’s level, an investment in Lloyds shares today would double in value in a little under 14 years. That’s with all dividends reinvested. But with no dividend increases and no share price gains over the period.
The value of dividends
Even without considering Lloyds specifically, that does show the long-term value of dividends.
Inflation is high right now, but that’s surely only temporary. Over the long term, UK inflation has been running around 2%. At that rate, prices would take 35 years to double. Buying dividend shares, in my view, is the best hedge against inflation there is.
What about the possibility of share price gains? Looking at the price chart, that might seem like a forlorn hope:
But Lloyds shares are on a forecast P/E of only a little over seven. That’s about half the long-term average for the FTSE 100.
Fair valuation?
I doubt Lloyds will reach that average valuation any time soon. I reckon all of the problems that have beset the banking sector over the past decade or so have brought about a key change in investor sentiment.
In the past, there was very much an attitude that whenever things are going well, they’ll be going even better for the banks. They do, essentially, cream a bit off the top of almost everything. Now I think it’s hit home that when things go badly, they can go even worse for the banks.
So what’s a fair P/E level for Lloyds now? I’m going to stick my finger in the air and say around 10. That would mean a Lloyds share price of 62.5p. If it should reach that, it would take a bit under 10 years for dividends to achieve the rest of the doubling. An investment today doubling in 10 years still looks pretty decent to me.
Holding Lloyds shares
In reality, as long as Lloyds’ business remains on track, I’ll expect earnings and dividends to keep on rising. And that should hopefully bring forward any doubling of an investment made today.
Will it actually happen? There are short-term risks facing Lloyds right now. Notably, our current economic outlook seems pretty dire. And any pressure on the housing market could hit Lloyds too.
But over the longer term, I remain confident that if UK business does well, the banking business will do well too. Lloyds remains a buy for me, and I’m holding.
