1 dividend superstar I’d buy over Lloyds shares right now

I sold my Lloyds shares recently and have used some of the proceeds to buy more of this high-yielding dividend star instead.

| More on:
Bronze bull and bear figurines

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I sold my shares in Lloyds (LSE: LLOY) recently and have invested some of the proceeds in M&G (LSE: MNG). This will increase my stake in the global investment manager, which I prefer over the bank for three key reasons.

Growth prospects

Lloyds’ 2023 results showed statutory profit after tax increased 41% — to £5.5bn from £3.9bn in 2022.

However, much of this jump in profitability came from a high net interest margin (NIM). This is the difference between the interest it receives on loans and the rate it pays for deposits.

Market expectations are that UK interest rates will fall from here. This is a key risk for Lloyds, as it will cut its NIM dramatically over time, and its earnings with it.

Another major risk is possible legal action for mis-selling car loans through its Black Horse insurance operation.

Overall, consensus analysts’ forecasts are for Lloyds earnings to decline at 0.3% a year to the end of 2026.

Conversely, M&G is forecast to see its earnings increase by 20% a year over that period.

These figures look well-supported to me by its 2023 results. They showed a 28% rise in adjusted operating profit from 2022 — to £797m.

They also saw a 21% year-on-year rise in its operating capital generation last year – to £996m. It looks a solid basis to achieve its £2.5bn three-year operating capital generation target by the end of this year. This can be a major engine for growth.

There are risks for the investment firm as well, of course. One is a new global financial crisis. Another is its relatively high debt-to-equity ratio of around 1.9.

Nonetheless, a clear win in this category for M&G, in my view.

Share valuation

Lloyds’ price-to-book (P/B) ratio is 0.7, against its peer group average of 0.6. So, it looks slightly overvalued on this measurement.

M&G’s P/B is 1.2, against a peer group average of 3.1 Therefore, it looks very undervalued.

To work out how much, I used the discounted cash flow (DCF) model. This showed the stock to be around 49% undervalued at its present price of £2.01.

So, a fair value would be around £3.94, although this doesn’t guarantee it will ever reach that level.

Another big win for M&G in this category too.

Dividend yield

In 2023, Lloyds paid 2.76p per share in dividends. With the share price at 51p now, this gives a yield of 5.4%.

M&G paid a total dividend of 19.7p a share last year. This gives a yield on the current £2.00 share price of 9.8%.

This difference in yield on the passive income I could make over time is massive. It’s even more if I reinvested the dividends paid me – known as ‘dividend compounding’.

On this basis, if Lloyds yield averaged the same over 30 years, a £10,000 investment would grow into £50,348. This would pay me £2,641 a year, or £220 a month.

On the same provisos, £10,000 invested in M&G would increase to £186,913, paying £17,381 a year, or £1,448 a month!

So, a huge win for M&G here as well, making three convincing wins out of three in these categories.

Consequently, my decision to use some of the proceeds of my Lloyds sale to buy more M&G looks well-justified in my view. 

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.

Simon Watkins has positions in M&g Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d invest £800 the Warren Buffett way!

Christopher Ruane learns some lessons from super-investor Warren Buffett he hopes could improve his own stock market performance.

Read more »

British Isles on nautical map
Investing Articles

Michael Burry just bought 175,000 shares in this FTSE 100 company

Scion Asset Management announced a $6.5bn stake in BP this week. But what could Michael Burry be seeing in an…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£5,000 in savings? Here’s how I’d aim to start making powerful passive income today

With a cash lump sum to invest, this Fool lays out how he'd start making passive income. He also details…

Read more »

Investing Articles

Just released: our 3 top small-cap stocks to consider buying before June [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

My best FTSE 250 stock to consider buying now for passive income while it’s near 168p

This is a rare stock with a growing underlying business and a fat dividend yield – it’s worth consideration for…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

2024’s a great year to earn passive income! Here’s how I’d do it for £10 a week

Christopher Ruane explains how he’d start putting a tenner a week into blue-chip shares to start building passive income streams.

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

£10k in an ISA? How does £840 passive income a year sound?

With these three high-yielding UK dividend stocks, investors could potentially generate a substantial amount of passive income every year.

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

What on earth’s going on with the Lloyds share price?

The Lloyds share price has surprised investors, including myself, in recent months. Investor sentiment's gone through the roof, but should…

Read more »