Let’s be honest here, Lloyds (LSE: LLOY) shares have been a regular source of disappointment. They’ve looked cheap for years, and stayed cheap.
Yet there is one absolutely brilliant reason to buy this FTSE 100 stock, which is exactly what I did last November. Now I’m wondering whether to buy more of it.
It’s fallen and fallen
The absolutely brilliant reason to buy Lloyds Banking Group is the dividend. Few will be surprised to hear that. It certainly isn’t great for capital growth, judging by the last 25 years. Since April 1998, the Lloyds share price has collapsed from almost 500p to just under 50p today.
That figure alone might put people off, but in a way it’s meaningless. April 1998 was obviously a terrible time to pick Lloyds as a long-term buy and hold. As was April 2007, just before the financial crisis, when it still traded at a respectable 300p.
Today it looks good value, trading at just 6.7 times earnings. That’s well below the figure of 15 that is usually seen as fair value.
The price-to-book ratio is just 0.7, where a figure of 1.0 represents fair value. Better still, in contrast to 1998, or 2007, Lloyds looks a far safer and surer operation. It has pulled out of the risky investment banking market, and now focuses on the basics of taking savings and lending money to UK-based businesses and consumers.
Of course, just because a stock has lost 95% of its value, as Lloyds has, doesn’t stop it from falling another 25%, 50%, 95%, or whatever. Yet the bank’s low risk-profile and stringent post-financial crisis regulation makes that less likely. During the recent banking crisis, Barclays wobbled but Lloyds stood firm.
I’d like to buy more of this
While I hope Lloyds shares rise in value at some point, I bought it for the dividend income. Currently, it yields 4.9%, well above the FTSE 100 average of 3.5%, and the shareholder payout is covered a comforting three times by earnings.
If I was to take my entire £20,000 Stocks and Shares ISA allowance for the 2023/24 financial year and tip it into Lloyds shares, I would generate income of £980 a year.
Next year, I would do even better, as the forecast yield is 5.8% (with cover still decent at 2.7 times). My £20k stake would generate annual income of £1,160. With luck, it should rise over time. In 2022, management upped the dividend 20%, from 2p per share to 2.40p.
Naturally, there are risks. As the UK’s biggest lender, Lloyds is exposed to a house price crash. No dividend is ever guaranteed, and if cash flows collapse, my planned income stream could fall short or vanish. If Lloyds did get sucked into a future banking crisis, then all bets would be off.
I wouldn’t invest my full £20,000 ISA allowance into Lloyds. That’s too much for just one stock and there are other shares I’d like to buy, anyway. I would like to invest, say, £2k or £3k this financial year. I want those dividends. And who knows, I might get some growth, too.
