EXCERPT: Lloyds shares keep getting cheaper and I keep buying them. I think they offer terrific income prospects. One day, they might even grow.
Lately I’ve developed a habit of buying more Lloyds (LSE: LLOY) shares every time they dip below 45p. At that price, they looked too cheap to resist.
Then on Friday 8 September the Lloyds share price dropped to 40.77p so what did I do? I bought more.
Lloyds is steadily turning back into the dividend machine that we knew and loved before the financial crisis. Today, it yields 5.8%, but that’s only the start. The latest dividend was nicely covered three times by earnings, given plenty of scope for progression. And that’s exactly what investors seem likely to get.
I’m earning income here
Analysts now reckon the shares are going to yield 6.78% this year, beating pretty much every savings account. That’s still not the end of it, as the yield is forecast to hit 7.53% in 2024, and with luck, keep rising after that.
Naturally, dividends are never guaranteed. If profits fall – or heaven forbid – we suffer a full-blown banking crisis, that income outlook could quickly darken. That’s the risk we take with every stock, of course.
Yet lately, the money has been rolling into Lloyds’ coffers. It made a pre-tax profit of around £6.9bn in each of the last two years. That didn’t help the share price much, because investors had hoped for faster growth, but it’ll keep those juicy shareholder payouts flowing.
It was the same story in the first half of the current financial year. Half-year profits rose 23% to £3.8bn, but investors felt hard done by because they hoped for £4bn.
While short-time investors may turn their noses up at Lloyds for its slow growth, I’m not in that category. The shares I’m buying today, I have no plans to sell. My retirement is still 15 years away, potentially, and I hope to be holding Lloyds then, too.
I’ve got long-term plans here
By then, I hope all my reinvested dividends will have compounded into something much bigger. With luck, the share price will put on a spurt at some point, too, further boosting my stake. When I stop working, I’ll start drawing my dividends as income.
The Bank of England look set to increase base rates yet again next week, which is a double-edged sword for Lloyds. While this will boost net interest margins, the difference between what Lloyds pays savers and charges borrowers, rising mortgage arrears and repossessions may offset that. As the UK’s biggest mortgage lender, Lloyds is on the frontline of the mortgage crunch.
I’m beginning to suspect that inflation and interest rates will stay higher for longer than I thought, but again, I’m willing to sit it out.
I still think we’ll escape a full-on house price crash but even if we don’t, it won’t change my attitude to holding Lloyds shares. I’ll sit tight and carry on reinvesting my dividends, while I wait for the recovery to come. If they fall below 40p at some point – and they easily could – then I might just buy more.
