Which is the better buy: Lloyds shares or this high-growth FTSE 100 dividend star?

I bought more of this FTSE 100 stock after I sold my Lloyds shares, and would do the same today based on earnings growth, valuation and yield potential.

| 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.

Person holding magnifying glass over important document, reading the small print

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.

A while ago I sold my Lloyds (LSE: LLOY) shares and used part of the proceeds to buy more Phoenix Group Holdings (LSE: PHNX) stock.

Approaching the end of Q3, I ran my key three stock-screening criteria to see if my decision still holds good.

Earnings growth potential

Ultimately, earnings are what powers a company’s share price and dividend higher.

Should you invest £1,000 in Burberry Group Plc 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 Burberry Group Plc made the list?

See the 6 stocks

In Lloyds’ case, analysts estimate that its earnings will rise by 5.1% a year to the end of 2026.

The forecasts are for Phoenix Group’s to increase by a stellar 72.9% each year to the same point.

A principal risk for Lloyds is a shrinking net interest margin as UK rates decline. This margin is the difference between interest on loans and deposits.

For Phoenix Group, a key risk is intense competition in its sector that may cause the same type of profit margin squeeze.

Overall, a win for Phoenix Group here, I think.

Relative stock valuation

On the key price-to-sales ratio (P/S) of stock valuation, Lloyds trades at 1.9 – the same as its peer group’s average. So, it is fairly valued on this basis.

Phoenix Group trades at a P/S of 0.3 compared to an average of 1.3 for its competitor group. Therefore, it looks undervalued here.

Specifically, a discounted cash flow analysis shows it to be 33% undervalued at its current £5.51. So a fair value would be £8.22, although it might go lower or higher than that.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL24 Sep 201924 Sep 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Another win for Phoenix Group, in my view.

Dividends

In 2023, Lloyds paid a total dividend of 2.76p, which gives a current annual yield of 4.8%.

Phoenix Group paid 52.65p, generating a yearly payout of 9.6%.

£11,000 (the average UK savings amount) invested in Lloyds would make £528 a year in dividends. Over 10 years on the same rate, it would be £5,280, and after 30 years £15,840.

The same amount invested in Phoenix Group would give £1,056 a year on its 9.6% yield. On the same average rate, it would be £10,560 after 10 years, and £31,680 after 30 years.

This big returns gap widens even more if the dividends are used to buy more of each of the stocks (‘dividend compounding’).

After 10 years of doing this (on the same 4.8% average yield), the Lloyds investment would have made an extra £6,760. After 30 years, it would have added £35,295.  

However, the Phoenix Group investment (on the same 9.6% average yield) would have generated an additional £17,619 after 10 years. And after 30 years, an additional £182,724 would have been made.

So, a third win out of three in my book for Phoenix Group Holdings.

Am I happy with my decision?

Consequently, I am extremely pleased I made the decision I did and would do the same again today.

Indeed, I intend to buy more Phoenix Group stock very soon, which I see as a prime ultra-high-yield stock.

Analysts estimate that its yield will rise to 9.9% by the end of this year. Further gains to 10.2% and then 10.5% are predicted, respectively, for 2025 and 2026.

For Lloyds, the forecasts are for a 5.3% yield this year, 5.6% in 2025, and 6.6% in 2026.

Should you buy Burberry Group Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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 Phoenix Group Plc. 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 Dividend Shares

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

I asked ChatGPT for the best safe havens in the FTSE 100 amid Trump’s tariffs 

Our writer isn't convinced by the answers that AI assistant ChatGPT rattled off when asked about solid FTSE 100 defensive…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Consider targeting £8,840 of annual passive income from 363 shares in this FTSE 100 heavyweight stock!

Investing in high-dividend-paying stocks with the returns used to buy more of the shares can generate potentially life-changing passive income…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

Up 5% in the last crazy week! Are these 2 income stocks the ultimate FTSE defensive plays?

Harvey Jones picks out two FTSE 100 dividend income stocks that have actually climbed while stock markets are heading in…

Read more »

Investing Articles

2 strong FTSE 100 dividend shares to consider as recessionary risks increase

Looking for secure passive income stocks to consider buying as thumping trade tariffs loom? Here are two FTSE 100 dividend…

Read more »

Investing Articles

Income of almost 12%! 3 stunning FTSE dividend stocks now have double-digit yields

Harvey Jones is amazed by the sky-high income on offer from these FTSE 100 dividend stocks, but he's also aware…

Read more »