With a tempting 6% dividend yield, Lloyds Banking Group (LSE: LLOY) shares are a popular choice with UK dividend investors.
However, with the UK economy (and the housing market) starting to slow, is this FTSE 100 stalwart the best stock for income hunters to buy today? Here’s what I think.
Why I might buy Lloyds
When I buy shares in a company, I always try and remember that I’m buying a stake in a real business.
My ideal investment is a company that’s cheap, good and improving. As a keen income investor, I also want to invest in companies with a reliable track record of dividend payments.
Lloyds scores quite well in several of these areas, in my view.
Cheap: Lloyds’ forecast dividend yield of 6% looks attractive to me, compared to the FTSE 100 forecast yield of 4.1%. The shares also trade below their book value, with a forecast price/earnings ratio of less than six.
Good: Admittedly, this 327-year-old bank did need a government bailout back in 2009. But a lot has changed since then. The Lloyds bank of today looks like a much safer business to me, with plenty of surplus capital and a good quality loan book.
Improving: Lloyds shares have lagged the FTSE 100 over the last 10 years. One big reason for this is that ultra-low interest rates have cut into the bank’s profit margins.
That situation is now changing. Interest rates have risen sharply this year. Most analysts expect increased borrowing costs for consumers and businesses to boost banks’ profits.
City forecasts for Lloyds’ 2022 profits have risen by more than 10% since the end of June.
One risk that worries me
Of course, a lot has changed since the bank’s last update, which covered the six months to 30 June. Political events have upset the financial markets. Mortgage rates have risen sharply. The energy price guarantee has been shortened from two years to six months.
I don’t know what will happen next. But I do know that Lloyds’ mix of mortgage lending, credit cards and business debt means that the bank is heavily exposed to the UK economy.
If the UK suffers a serious recession and the housing market slumps, Lloyds could see a sharp rise in bad debts and overdue loan repayments. That could hit future profits and limit the company’s ability to increase its dividend.
Lloyds shares: my verdict
At the start of this article, I asked if Lloyds was the best dividend share to buy today.
Having taken a fresh look at this business, my view on Lloyds is that, at current levels, the shares are probably a decent buy for income. The forecast yield of 6% looks safe enough to me. I don’t expect a cut in the near future.
However, I don’t think Lloyds is the best dividend stock I could buy today. In my view, there are other businesses which offer a stronger mix of financial strength and growth potential. I’m not going to add Lloyds to my portfolio right now, but I haven’t ruled it out as a possible purchase in the future.
