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Lloyds Banking Group PLC Is My Top Stock Pick For 2016

What was different about 2015? Well, it will go down as the year of the crashing dividends. FTSE 100 big boys AntofagastaCentricaGlencoreWM MorrisonJ SainsburyStandard CharteredTesco and now Anglo American have all slashed their dividend payouts this year in a brutal mass cull.

This hurts, given the relative importance of dividends to investors in today’s lower growth, lower interest rate world. It also boosts the attraction of companies that are looking to raise their dividends, especially if they have the strength to sustain them. Few companies plan to hike their dividend payouts as aggressively as Lloyds Banking Group (LSE: LLOY). Better still, the relatively conservative nature of its revamped business should make this sustainable.

Bright Eyes

Right now, Lloyds isn’t much of an income stock, yielding just 1.1%. But its future is so bright, I’m wearing shades. Today, the dividend is covered a massive 10.8 times. Expect that to shrink next year, as dividend growth goes supersonic. By the end of 2016, Lloyds is on a forecast yield of 5.1%, almost five times what you get today. Some analysts reckon it could hit 7% in a few years, when interest rates may still be at low, low levels.

Its dividend prospects were given a further boost after Lloyds passed the Bank of England’s stress test last week. The BoE set a threshold of core tier 1 assets of 11%, comfortably below Lloyds’ 13.7% ratio. With a healthy total capital ratio of 22%, Lloyds can spend less of its cash topping up its reserves, and distribute more to shareholders. Buy now, sit tight, and let the income flow!

Big year ahead

Next year will be a biggie for Lloyds in other ways with its retail investor flotation in the spring. By the end of June 2016, the bank should be fully in private hands for the first time in seven years. The taxpayer’s stake is already down to 9%, from 43% at the height of the crisis.

Some investors will want to wait until the share offer, buoyed by promised discounts of at least 5%. Almost a quarter of a million people have already applied. There’s a risk to writing, as the ‘Tell Sid’-style campaign could be oversubscribed, as happened with Royal Mail. Also, the excitement could push up the share price. Don’t let that put you off buying Lloyds today, if you’re as positive about its prospects as I am.

The price is right

2015 has been a rough year for the Lloyds share price, which is down 11%. That’s despite posting underlying profits of £6.36bn in the first nine months of 2015, up 6% year-on-year. This has been a troubled year for markets generally, of course, and Lloyds has been hit by its PPI mis-selling hangover and other scandals. But barring accidents, these should inflict less damage in future.

Lloyds won’t be a bumper growth stock. Its focus on UK retail and business banking services makes it a big fish in a medium-sized pond and the new breed of challenger banks may nibble away at its market share. Earnings per share are forecast to fall 8% next year. But at 8.6 times earnings, the price is right. Slow interest rate growth will limit bad debts, which are now at rock bottom levels. With dividend payouts crashing all around it, Lloyds set to be the income hero of 2016.

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