For a brief, happy moment at the start of this month, my Lloyds (LSE: LLOY) shares sprang into life and suddenly started growing. There’s not been much of that lately, with the stock falling 0.22% over 12 months, and 27.67% over five years.
The moment was fun while it lasted, which unfortunately it didn’t. But it gave me a glimpse of what Lloyds shares could do once market conditions swing back in their favour.
I’ll have more fun again
The short-lived Lloyds share price rally was built on hopes that interest rates had finally peaked, and might start falling at some point next year. I’ve built a relatively big stake in the FTSE 100 stock over the summer. Suddenly, I found myself sitting on a meaty gain in just a handful of trading sessions.
Then market sentiment reversed, as investors realised the Federal Reserve is plotting yet more rate hikes to cool the red-hot US economy. Expectations that interest rates will stay ‘higher for longer’ sent bond yields soaring. This hit demand for dividend income stocks, which are considered riskier.
Personally, I prefer top FTSE 100 dividend stocks over bonds. I think that in the longer run they’ll offer a higher total return, from dividends and share price growth. Equity investors like me may need to be patient as the volatility drags on, but that’s fine with me. I buy shares with a minimum five-year view, but ideally I’d like to hold my Lloyds shares for decades.
The Lloyds board has steadily being restoring the dividend after the ravages of the financial crisis, and it’s now expected to yield 6.45% in 2023 and a thumping 7.23% in 2024. That’s a staggering rate of income, if you ask me. By contrast, 10-year gilts yield 4.8%.
I’ll buy more if it dips
Today, Lloyds shares trade below 43p at a P/E of just 5.8 times earnings. Its price-to-book ratio is 0.6. So yes, it’s cheap as chips. The problem is that it’s been cheap for years, without regaining its lost value.
I totally accept that a full-blooded Lloyds share price recovery will take time. As the UK’s biggest mortgage lender, it’s had to make hefty debt provisions in case house prices crash. While I don’t expect a total meltdown, we’re in a very different world today. There’s no sign of a quick return to near-zero interest rates.
Yet at the same time, this will help Lloyds maintain net interest margins — the difference between what it pays savers and charges borrowers. That should help underpin profitability. It already makes a fair wedge, with first-half profits of £3.8bn.
Even if the share price doesn’t recover in 2024, the dividends should keep flowing, with management recently hiking the interim payout by 15%. That makes the shares unmissable for me.
At the moment, investing feels like stockpiling shares for a brighter tomorrow. I’m taking advantage of any dip in my favourite stocks to load up on more of them. As always, I’m reinvesting all of my dividends for growth. I’ve no idea when Lloyds shares will eventually take off. But when they do, I’m expecting to have a lot more fun.
