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Why Do Investors Love Lloyds Banking Group PLC?

You may be surprised to hear that investors hold warm feelings towards Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), given the widespread fear and loathing the big banks inspire.

Everything is relative, but right now Lloyds is the most favoured UK bank among DIY investors, with 14% holding it in their private portfolios, according to new figures from Hargreaves Lansdown.

Collectively, DIY investors hold 2.5% of their portfolios in Lloyds. Given that it makes up 1.9% of the FTSE All Share, they are effectively ‘overweight’ in the stock.

Jam Today, More Tomorrow

And they’re not the only ones casting a forgiving smile of Lloyds. One in five UK equity income fund managers now own its shares, even though it hasn’t paid a dividend since 2008. By comparison, just 14% own Standard Chartered, which currently yields a mighty 6%.

Fund managers are looking to the future, of course, and will feel vindicated now that Lloyds has announced its first dividend in six years, at 0.75p per share.

They are buying Lloyds because they reckon its dividend prospects look more promising than they do at Standard Chartered.

Artemis fund manager Adrian Frost said: “Lloyds has a strong capital position and is achieving its regulatory targets, and as this capital builds it is more a question of when rather than if the dividend rises.”

Lloyds offers jam tomorrow, even if it is spread a bit thinly today. By contrast, Standard Chartered’s payout could be toast.

DIY Investors ‘Heart’ Lloyds

Although more private investors, 4%, hold HSBC than Lloyds, HSBC is worth 5.5% of the All-Share, so they are actually ‘underweight’. They are also underweight on Barclays as well.

Some of this may be a hangover from the burst of growth Lloyds enjoyed in 2012 and 2013, when it rose around 200%, and private investors leapt on board, hoping to ride high on the momentum.

Chief executive Antonio Horta-Osorio is nicely on course to return the bank to rude health, which will see the end of government ownership, as the taxpayer’s remaining £13.5bn stake is sold off. It should also see a steady return of the juicy dividend for which Lloyds was once rightly famed.

By December 2016, the bank is forecast to yield 5.2%. It isn’t hard to see why investors like the idea of locking into that income stream today.

Horta-Osorio has clipped the bank’s international wings, and it will now focus on its UK retail offering.

The risks will have been reduced but the rewards remain, making Lloyds one of the most exciting income prospects on the FTSE 100 today.

If you can't wait until 2016 to bag a juicy 5% yield, don't worry, plenty of top UK stocks deliver that today.

The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.