Forget Lloyds shares! I’d rather buy this FTSE 100 dividend growth stock

Dividends on Lloyds shares are tipped to rise strongly through to 2026. But Royston wild thinks this passive income hero is still a better buy for him.

| 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 female business analyst looking at a graph chart while working from home

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 (LSE:LLOY) shares are always in high demand among dividend investors. At first glance, it’s not difficult to see why.

High street banks offer essential services like loans, mortgages, credit cards and current accounts. As a consequence, they tend to enjoy stable cash flows they can then use to pay consistent dividends.

On top of this, the financial regulator demands that banks hold significant capital reserves, providing dividends with added stability.

Should you invest £1,000 in Legal & General 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 Legal & General made the list?

See the 6 stocks

Finally, the dividend yield on Lloyds shares is 6% for 2024, beating the 3.5% FTSE 100 average by a large distance. The yield marches to 6.2% and 7.1% for 2025 and 2026 too.

However, I wouldn’t touch the Black Horse Bank with a bargepole right now. If I was seeking dividends, I’d much rather add support services provider Bunzl (LSE:BNZL) to my portfolio.

Dividend growth

First, let’s take a look at Bunzl’s dividend forecasts for the next three years.

YearDividend per shareDividend growthDividend yield
202473.89p8%2.1%
202579.61p8%2.3%
202684.83p7%2.5%

As you can see, these dividend yields are substantially lower than those on Lloyds shares. But let’s look past the final column for a moment.

Instead, let’s look at annual dividend growth. If broker forecasts to 2026 are correct, Bunzl will have raised the annual payout for an astonishing 34 years on the spin.

Payout growth has been more impressive at Lloyds of late. It raised the full-year dividend 15% in 2023, far ahead of Bunzl’s near-9% rise.

But I’m not going to buy a stock just based on dividends.

Stunning returns

Income forms an important part of my investing strategy. A stock that pays a decent and growing dividend gives me money I can reinvest, a concept that — through the mathematical miracle of compounding — can allow me to grow my portfolio exponentially.

But dividends are only one part of the investing equation. The passive income a company provides can be negated by a stalling or reversing share price, resulting in an overall disappointing return.

Taking into account share price movements and dividends, Lloyds has delivered a paltry total shareholder return of 2% since 2014. That’s far below the 131% that Bunzl has provided in that time.

Share price movements since 2014.
Share price movements since 2014. Source: TradingView

Lloyds vs Bunzl

Past performance is not a guarantee of future returns. But I believe the contrasting performances of these FTSE 100 stocks will continue.

Sure, Lloyds is an industry giant in the UK, and has significant brand power it can leverage. But its growth potential is limited given Britain’s mature banking sector and the murky economic outlook. And Lloyds could face billions of pounds in fines if found to have mis-sold motor finance in recent years.

Both of these are likely to weigh on its share price and potentially dividends.

By contrast, Bunzl has considerable earnings possibilities as it continues its acquisition-based growth strategy. M&A strategies like this carry extra risk, but the firm’s strong track record is highly encouraging.

Bunzl also has considerable exposure to the enormous US economy, as well as operations in fast-growing emerging markets. If I had cash to invest today, I’d rather put it here than use it to buy Lloyds shares.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

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

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »