Is Lloyds still one of the best dividend stocks to buy now?

The Lloyds dividend yields more than 6% despite the stock’s strong rise this year. But can investors trust the bank’s valuation?

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Lloyds Banking Group‘s (LSE: LLOY) one of the most popular dividend stocks on the London stock market.

I think the banking company attracts investors because of its low-looking valuation and high dividend yield. Yet over the past four months or so, the share price has risen by more than 30%.

However, with the stock now near 55p, the valuation still looks low when compared to the wider FTSE 100 index.

Dividend set to rise

City analysts following the company expect earnings to rebound by almost 17% in 2025 after falling by a similar amount this year. But the all-important dividend looks set to grow both this year and next.

Set against those expectations, the forward-looking price-to-earnings (P/E) ratio is just above seven and the anticipated dividend yield is just over 6%.

Meanwhile, the Footsie’s forward earnings multiple is about 13.5 and the expected yield is around 3.5%.

At first glance then, Lloyds still looks cheap. And other indicators bolster the case for good value, such as the price-to-tangible book value running near 0.89. A reading of one would means the stock price matches the value of the underlying assets. So the Lloyds price is offering investors a discount right now.

But is the company actually one of the best dividend stocks to buy right now? Well, there are some factors to consider that may mean Lloyds isn’t as cheap as it looks.

One of the big ones is the volatility often seen in the value of the firm’s assets. For banks, assets include reserves of financial instruments held, and money others owe to the firm because of loans the company has made.

However, in tough economic times, financial instruments can plunge in value and struggling individuals and businesses can default on their debts.

The worst-case scenario?

I remember the uncertainty surrounding banks in the wake of the credit-crunch and financial crisis of the noughties. Nobody appeared to be able to put a finger on what banks’ assets were actually worth.

In a situation like that, the only logical thing for the stock market to do is mark down share prices well below the last-known asset values of banking companies. That’s what happened back then, and bank stocks plunged by more than 90% in some cases.

But what now, while economies are ticking along quite well? It makes sense that the market should keep Lloyds and the other bank’s valuations pegged down. After all, we never know for sure when the next economic downturn will arrive.

So to me, high dividend yields, low P/E ratings and discounts to tangible net asset value are likely to be a permanent feature. However, that can all go out the window if we ever see another raging, bubble-like bull market! Banks stocks have flown before, and Lloyds may continue rising now. After all, forecasters expect earnings to rise next year.

Nevertheless, there are undeniable cyclical risks when owning shares in Lloyds. So for me, it’s not one of the best dividend stocks to buy now, and I’d seek dividend opportunities elsewhere.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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