Hargreaves Lansdown shares have a 5% dividend yield. Should investors buy them?

Hargreaves Lansdown shares sport an attractive dividend yield at the moment. They also trade at a low valuation. Is this a great investment opportunity?

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Hargreaves Lansdown (LSE: HL.) shares have more than halved in value over the last two years. As a result, the dividend yield here has climbed above 5%.

Is it worth investing in the well-known financial services company, given this attractive yield? Let’s discuss.

A good dividend stock?

Whenever I’m looking at a dividend stock, the first thing I think about is the company’s growth potential. Ultimately, growth is the key to strong long-term investment returns.

Now, looking at Hargreaves Lansdown, I do see plenty of potential for growth. This is a company that has a very scalable platform. And in the long run, it stands to benefit from rising stock markets (higher stock prices will increase its earnings).

It’s worth noting here that in the first half of the current financial year (ending 30 June), the company added 31,000 new customers. This helped push revenue up 20% year on year.

An industry leader

The next thing I look for is a competitive advantage. Does Hargreaves have one?

I think so. For starters, it offers a world-class investment platform that provides access to thousands of investments. And it has a high market share.

Secondly, there’s a stickiness to its business model as investors tend to be glued to their chosen investment platforms. This is illustrated by the fact that in H1, client retention was 92%.

Very profitable

I also examine a company’s profitability. I like to invest in companies that generate a high return on capital. These firms have more money to reinvest for future growth.

Here, Hargreaves scores very well. Over the last five years, return on capital has averaged 62%. That makes it one of the most profitable companies in the FTSE 100.

Great dividend track record

Finally, I take a look at the dividend track record. And Hargreaves scores well here too.

The table below shows the company has consistently increased its payout in recent years. It has also paid out quite a few special dividends.

FY2022FY2021FY2020FY2019FY2018FY2017FY2016
Ordinary dividend 39.7p38.5p37.5p33.7p32.2p29.024.1
Special dividend0.0p12.0p17.4p8.3p7.8p0.0p9.9p

It’s worth noting that for FY2023, analysts expect a payout of 41.2p per share. Overall, I see Hargreaves Lansdown as a high-quality business.

Good value?

What about the valuation though? Well, at present, the company is expected to generate earnings per share of 64.1p for the year ending 30 June.

That puts the stock on a price-to-earnings (P/E) ratio of about 12.3. At that multiple, I see a lot of value on offer.

My view

Now there are risks to consider here, of course. Later this year, the company is getting a new CEO, and the incoming boss may decide to reduce the dividend payout.

An ongoing lawsuit on behalf of Neil Woodford investors is another issue to monitor. This could hit profits in the near term.

Overall though, I see Hargreaves Lansdown shares as an attractive investment today. I think they have the potential to provide both capital gains and dividends going forward.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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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