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?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Black man sat in front of laptop while wearing headphones

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.

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%.

Created with Highcharts 11.4.3Lloyds Banking Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

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 £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »