I’ve been loading up on Lloyds (LSE: LLOY) shares over the summer, and my decision to build a stake in the stock is gradually beginning to pay off. I recently reinvested my first dividend. I’m already about 5% up overall even with the shares still trading at under 45p.
These are early days, of course. Like all the shares I buy, I’m planning to hold Lloyds for 10 or 20 years, with luck, and ideally longer. So what happens in the first couple of months is neither here nor there.
What this does do is show the attraction of buying top FTSE 100 stocks when they’re cheap, as I think Lloyds is. Even though markets are a bit shaky right now – particularly in the US – I don’t think its share price has much further to fall. Unless something really extreme happens.
One of my favourite stocks
Given my strategy of averaging down, it also means I’m not worried if it does drop. In that case, I’ll simply buy more Lloyds stock at the lower price.
Naturally, buying shares always has risks, even a top blue-chip like Lloyds. While UK interest rates have peaked, inflationary pressures in the US could upend my assumptions.
Higher interest rates would put the housing market under more pressure, which would hit Lloyds as the biggest UK’s biggest mortgage lender. In July, news that it had set aside an extra £662m for potentially bad loans, up 76% in a year, tanked the share price.
However, with five-year fixed mortgage rates dipping below 5%, I still don’t expect a full-blown crash, despite the struggles faced by first-time buyers.
The assumption now is that interest rates will stay higher for longer, with no immediate cut next year. I think that’s overdone. The market is in a volatile mood. One day it’s upbeat about interest rate cut prospects, the next buried in gloom. What was that Warren Buffett quote about the stock market being a manic depressive?
I’m not as moody as the market
I don’t accept that we need to return to near-zero interest rates for Lloyds shares to take off. That would squeeze net interest margins, the difference between what it pays savers and charges borrowers, and base rates of 3% of 4% might work better.
When markets are feeling nervous, as today, it pays more than ever to keep a cool head, and that’s what I’m doing about Lloyds. At today’s low valuation of just 6.2 times earnings, I feel there’s plenty of scope for a recovery. Maybe later this year, maybe in the spring. Who knows? All I know is that it should come at some point, and when it does, I’ll be holding Lloyds shares.
Current volatility is a good time to buy more, and lock in its juicy yield. It’s now forecast to yield 6.12% in 2024, revising to 6.86% in 2025.
Markets are down on Lloyds. Its recent 23% rise in half-year profits to £3.8bn didn’t change that. Even if it doesn’t recover as much as I hope and expect, its high and rising dividend yield still makes this a terrific time for me to buy it.