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Lloyds Banking Group is my ultimate FTSE 100 high yield hero

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I will start with an admission. Despite naming Lloyds Banking Group (LSE: LLOY) my ultimate FTSE 100 high-yield hero, it is not the full package yet. For example, its current yield is ‘just’ 4.9%, and there are higher yields to be had on the index right now. Be patient, because its day will come.

Bank on it

Today’s 4.9% yield is forecast to become 5.5%, an increase of more than 12% on today. At that point, it will still have generous cover of 2.1, giving management a platform to increase the dividend further. Forecasters believe that in 2019 the yield will hit a whopping 5.9%.

Lloyds is returning to full fitness, and at quite a pace. Remember, it only paid its first dividend post-financial crisis as recently as February 2015. Three years later, in February 2018, it was lavishing shareholders with more than £3bn in dividends and surplus capital.

Thanks a billion

Again, the group was not over-stretching itself, given that it had just reported a 24% jump in pre-tax profits to £5.3bn. That allowed it to hike its dividend by 20% and announce a buyback programme worth an extra £1bn. It feels good to be a Lloyds shareholder, or so you might think.

Not everybody agrees, though. Investors have not been rushing to buy the stock, despite these rewards. The Lloyds share price trades at almost exactly the same level it did five years ago. It has gone nowhere in that time. Currently, it trades at an embarrassingly low forecast valuation of just 8.2 times earnings. Don’t people like high-yielding stocks anymore?

Boring fun

Some investors even think Lloyds is boring, which I find strange, because every portfolio needs a stock this dull and this generous with the dividends. Boring is good up to a point although personally, I find the rate at which Lloyds is dishing out cash rather exciting (perhaps I should get out more).

There are potential headwinds. You never know when the next mis-selling scandal will strike, and there is still another year for unhappy customers to submit PPI claims (Lloyds has been the worst offender). The UK economy is very weak and Lloyds has massive domestic exposure, with little international activity to compensate.

Save the day

A slowing housing market is another concern, as prices and transactions stagnate. Lloyds also has exposure to the UK motor finance and credit card markets, which can be volatile, especially as consumers struggle with slow wage growth. Brexit could turn uglier. My Foolish colleague Jack Tang sets out the dangers here. However, Peter Stephens still reckons it could help you retire early.

Despite my concerns about the UK economy, Lloyds still has the hallmark of a long-term dividend hero. Its operating margins are forecast to increase to 41.6% (against just 15.4% today). The price-to-book ratio is 0.9, suggesting undervaluation. Earnings per share are forecast to rise 66% this year.

Its yield is particularly attractive with the Bank of England holding base rates at 0.5% yet again, and no change expected before November. In a low interest rate world, high-yielding Lloyds saves the day. That’s what heroes do.

Buy-And-Hold Investing

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.