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How Lloyds Banking Group PLC Could Be A Better Dividend Stock Than National Grid plc

On the face of it, National Grid (LSE: NG) (NYSE: NGG.US) is a far more appealing income stock than Lloyds (LSE: LLOY) (NYSE: LYG.US). That’s because it currently yields 5.1%, while Lloyds has only just recommenced the payment of dividends and is expected to yield around 3.5% in the coming year.

However, delving deeper than just the headline yield shows that, in the long run, you may receive a higher income from shares in Lloyds than from holding a stake in National Grid. Here’s why.

Profitability

While Lloyds has endured a hugely challenging period in recent years, with the credit crunch causing its bottom line to plunge to major losses, its future looks set to be extremely profitable. Certainly, there remain a number of problems that Lloyds and its sector peers will need to overcome, notably regulatory issues, PPI claims and a slow-growing Eurozone, but things really do seem to be on the up for Lloyds.

Furthermore, the bank is still targeting the payment of around 50% of earnings as a dividend and, in the long run, Lloyds’ payout ratio could rise to the 65% figure that its CEO is believed to be aiming for. As such, Lloyds is expected to yield 5.2% in 2016 from a payout ratio of 50%, which is exactly the same as National Grid is forecast to yield in the 2016 calendar year. As a result, following their difference in yield in the current year, the two stocks are tied when it comes to which is the higher income payer in 2016.

Looking Ahead

However, where Lloyds could surpass National Grid with regard to dividend payments is in terms of its future prospects. Finally, the ECB has decided to undertake a quantitative easing programme and, while it may not prove to be a ‘silver bullet’, it could mean that the growth prospects for the UK and global economies improve significantly. This would mean higher asset prices, higher demand for new loans and fewer bad loans moving forward – all of which would bolster Lloyds’ profitability. And, with its commitment to paying 50%+ of profit as a dividend, shareholders would be beneficiaries of any improved performance.

On the other hand, National Grid’s profit growth prospects are somewhat limited. Certainly, it has the potential to keep up with the wider market’s growth rate but, realistically, regulatory involvement and rising interest rates (which will cause its debt to become more expensive to service) could cause its bottom line to rise at a more modest pace than that of Lloyds.

So, while their headline yields currently differ and National Grid rightly has a reputation as a top income stock, Lloyds could prove to be an even better investment when it comes to dividends.

Of course, Lloyds and National Grid aren't the only appealing income stocks in the FTSE 100. That's why the analysts at The Motley Fool have written a free and without obligation guide called How To Create Dividends For Life.

It's a simple and straightforward guide that you can put to use on your own portfolio right away. And, in time, it could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle.

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Peter Stephens owns shares of Lloyds Banking Group and National Grid. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.