1 FTSE 100 dividend superstar I’d buy again over Lloyds shares right now

I recently sold my Lloyds shares and used part of the proceeds to buy this very high-yielding but out-of-favour stock instead. I’d do the same again now.

| 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 Lloyds (LSE: LLOY) recently for two key reasons.

First, it trades too much like a ‘penny share’ for my taste. Strictly speaking, it is not one as its market capitalisation is too big. But at just 56p a share, every penny it moves is nearly 2% of its value!

Second, it does not pay big enough dividends for me. Since I turned 50 a while ago, I have focused on buying shares with high yields so I can increasingly live off the income. 

These shares also need to appear set for growth, as this is what drives increases in dividends over time.

And they need to look undervalued, as this lessens the chance of big share price falls wiping out dividend gains.

I invested part of the proceeds from the Lloyds sale into British American Tobacco (LSE: BATS) based on this strategy.

Growth outlook

Consensus analysts’ forecasts are for Lloyds earnings to grow by 4.9% a year to the end of 2026. Earnings per share are forecast to increase by 8.4% a year over that period. And return on equity is predicted to be 11.3% by the same point.

For Lloyds, one risk is declining profit margins as interest rates fall in the UK. It also faces legal action for mis-selling car loans through its Black Horse insurance operation.

British American Tobacco, by contrast, is forecast to see its earnings increase by 49.4% a year to end-2026. Earnings per share are expected to increase by 47.8% a year over that period. And return on equity is predicted to be 16.4% by the same point.

For British American Tobacco, a risk is potential legal action for health problems caused by its products in the past. Another is a loss of competitive advantage caused by any delays in its transition to nicotine replacement products.

But overall, a clear win for the tobacco firm in this category, in my view.

Share price valuation

Using the key price-to-earnings (P/E) measurement, Lloyds currently trades at 7.8, against a peer group average of 7.6. So it looks slightly overvalued against its peers.

British American Tobacco trades at a P/E of 6.6, against a peer group average of 13.2. So it looks clearly undervalued.

Another clear victory for British American Tobacco, I think.

Dividend yields

Lloyds paid 2.76p a share in dividends in 2023, giving a yield on the current 56p share price of 4.9%.

British American Tobacco paid 230.89p in the same year, giving a yield on the present £24.76 share price of 9.3%.

The difference in yields is massive when it comes to the payouts I would receive over time.

For example, £10,000 invested in Lloyds at an average of 4.9% will give me an investment pot of £43,362 after 30 years. This would pay me £2,069 a year, or £172 a month in dividends.

But £10,000 invested in British American Tobacco at an average of 9.3% will result in more than three times the Lloyds amount.

Specifically, £161,068 after 30 years. This would pay me £14,251 a year, or £1,188 a month!

So, another huge win for the tobacco firm here as well, making three out of three.

Consequently, I am extremely pleased with my decision to swap Lloyds for British American Tobacco and would do the same again today.

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 British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Lloyds Banking Group 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

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

£9,000 in savings? That could become passive income of £19,175 a year

It's possible to invest affordable sums of money into building a big passive income stream. Here's how I'd go about…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a…

Read more »

Investing Articles

With a 7% yield and 4.1 P/E, is this the best passive income stock on the FTSE 350?

Millions of Britons invest for a passive income. While our writer isn't buying this stock yet, he believes it's worth…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

This amazing FTSE 250 has a 8.8% dividend yield and trades at just 4x forward earnings!

Our Foolish writer believes this FTSE 250 stock is worth keeping a very close eye on. However, he's not keen…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Could this brilliant airline stock be the most undervalued company on the FTSE 100?

Our writer believes this FTSE 100 stock may provide market-beating returns over the coming years, noting its undervalued metrics and…

Read more »