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What This Top Dividend Portfolio Is Holding Now: Lloyds Banking Group PLC, Barclays PLC And Prudential plc

Merchants Trust (LSE: MRCH) recently released its half-year results, and is on the way to delivering a 34th consecutive year of dividend increases. Picking great dividend shares has helped Merchants outperform the FTSE All-Share Index over the past three, five and 10 years.

Merchants reckons that, after the fall in equities since the spring, “several of the mega-caps, which have led the market decline, offer exceptional value, with BP, Royal Dutch Shell, GlaxoSmithKline and HSBC all yielding over 6%”.

These high-yield usual suspects were already held by Merchants. But, perhaps more interesting, are some new holdings the trust has bought during the summer sell-off; notably, Lloyds (LSE: LLOY), Barclays (LSE: BARC) and Prudential (LSE: PRU).

Lloyds

Merchants bought into Lloyds during July (and appears to have added further during August). The Black Horse has been the trust’s biggest new bet, and as of the end of August stood at no. 6 in its top 10 holdings.

Merchants explains its reasons for buying the bank:

“[Lloyds] is once again making good financial returns and has returned to paying dividends. It has a strong market position in the attractive UK retail and corporate banking markets. Although the valuation has recovered somewhat since the recession, we see scope for a continued revaluation as confidence builds in the bank’s ability to grow, which should also support strong dividend growth”.

The trust adds:

“It can also be argued that highly regulated banks, carrying greater levels of capital, should be more stable in the future and can sustain a higher valuation, although this is not necessary to justify investing at this point”.

Analyst dividend forecasts for the current year give Lloyds a yield of 3.3%, rising to 5.1% next year, as the City expects the bank to gallop towards the Board’s medium-term target dividend payout of at least 50% of earnings.

Barclays

Merchants also bought into Barclays during July, explaining the attractions as follows:

“Barclays has further to go in restructuring its investment bank and shrinking its non-core activities. However it owns the highly valuable Barclaycard business, an attractive African franchise and strong UK retail and commercial operations. The valuation of Barclays is lower than Lloyds, reflecting more depressed profitability and the on-going restructuring challenge, but the upside is potentially greater in the medium term”.

As Barclays works through its restructuring, City analysts expect the Board to pay out a cautious proportion of earnings as dividends for the time being: forecasts give a current-year yield of 2.7%, rising to 3.6% next year. As an indication of potential, though, if Barclays were to pay out the same level of earnings as Lloyds, it would actually have a higher yield than the Black Horse.

Prudential

Insurer Prudential — in contrast to Lloyds and Barclays — has been a consistently highly rated, expensive-looking financial stock. However, Merchants made Prudential a new holding during August, explaining:

“This company has an exceptional growth record and an attractive position in the fast growing Asian life insurance market, as well [as] strong businesses in UK and American life insurance and fund management. The shares have been weak performers in recent months on macro concerns about Asian growth, as well as specific regulatory concerns in the USA and the UK. We believe these concerns are exaggerated and so took advantage of a rare drop in the company’s valuation to buy a position”.

It says something about how highly Prudential has been valued by the market that, despite the shares now being almost 20% below their 52-week high, the forecast current-year dividend yield is only a modest 2.8% rising to 3.1% next year. Having said that, Prudential is currently paying out less than 40% of its earnings in dividends, so there is scope for dividend increases to get an extra turbo boost, if the Board decides to increase the payout ratio at some point.

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