Lloyds (LSE: LLOY) shares look like a screaming buy for income seekers right now, in my view, with a forecast yield of 6%. Better still, that is covered 2.7 times by earnings, giving management plenty of scope to increase shareholder payouts in future.
This gives me the prospect of a juicy income that potentially rises over time, and will protect the purchasing power of my money from inflation.
One of my favourite stocks
Lloyds is also one of the safer stocks on the FTSE 100. It’s exited the riskier parts of the banking sector, primarily investment banking, to focus on the boring everyday stuff, such as lending money to consumers and businesses, and holding their deposits.
Investors who prefer share price growth to income should probably look elsewhere. Measured over five years, Lloyds stock is down 29.96%. Over the last year, it’s up a modest 7.66%. That’s a bit better than the FTSE 100, which grew 3.72% over the same period.
Lloyds is dirt cheap, trading at just 6.4 times earnings with a price-to-book ratio of 0.6. However, I have to remind myself not to get too excited by the low valuation. Its shares have looked cheap for years, without recovering their lost value. A decade ago, it traded at 60.62p. Today, I would pay 47.72p, some 21% less.
I own some Lloyds shares and I would like to buy more. I also want to be in the position to retire in the next 10 years, if I choose. When I do, I hope to generate roughly around two thirds of my retirement income from the State and private pensions, with the remainder coming from FTSE 100 dividend shares held inside a Stocks and Shares ISA.
A single person needs £22,300 a year to achieve the ‘minimum’ living standard, according to the Pensions and Lifetime Savings Association. With Lloyds expected to pay a full-year dividend of 2.7p per share in 2023, I’d need to buy a whopping 825,926 shares to generate that income. At today’s price of 47.42p, that would cost me £391,654. Unsurprisingly, that’s far too much for me to put into a single direct equity.
I’ll need to diversify a bit
Lloyds is relatively low-risk, but every stock has its threats. The most immediate danger is a recurrence of the banking crisis although, with luck, Lloyds should avoid contagion. Another worry is that the UK economy struggles for years, and Lloyds suffers from rising bad debts and shrinking cash flows, hitting both its dividend and share price.
I would therefore spread my risk by investing in a dozen FTSE 100 stocks, some of which offer even more promising yields than Lloyds. I hold fund manager M&G, for example, which currently pays income of 9.67% a year. I recently bought Legal & General Group, which yields 8.27%, and Rio Tinto (7.71%).
If I could secure an average yield of 7% a year, I could generate my £22,300 income target from a slightly smaller portfolio of £318,571. That’s still a lot of money but I’d have a working lifetime to build it. Lloyds shares will play a starring role in my retirement income, but I won’t let them carry the whole show.
