Income stocks, don’t you just love ’em? The very best yield 5%, 6% or 7% a year, which is tremendous given that the average savings account pays just 0.53%. They also offer the opportunity for capital growth if stock markets rise, plus further growth from reinvesting your dividends.
It’s when you stop working that dividend stocks really come into their own. While the basic State Pension pays an income of just £8,546 a year, the sky’s the limit if you build a balanced portfolio of income generating stocks.
And the winner is…
One of my favourite FTSE 100 income stocks is Lloyds Banking Group (LSE: LLOY) and I’m not alone in my admiration. It was the single most bought share in the first six months of this year, according to The Share Centre. Clearly, a lot of other people like Lloyds too, and with good reason.
The bank is steadily putting its past mis-selling misdemeanours behind it, including a whopping £19bn in PPI provisions, and tidying itself up for the future. It recently posted a 7% rise in underlying half-year profits to £4.23bn, while its net interest margins improved to 2.93%. The bank’s core equity tier, one ratio which measures balance sheet strength, has hit a healthy 15.1%.
Brexit stage left
As with every stock, there are potential dangers. Brexit is one worry, amid growing talk of no deal. Lloyds has a relentless focus on the domestic UK economy and if savers, borrowers and small businesses feel the squeeze, so will the bank’s margins, while bad debts and impairments could rise.
The stock has struggled to make headway since the financial crisis. Right now, it trades at just 61p. As my Foolish colleague Roland Head points out, that’s well below the 200p it touched before the financial crisis. It has a long way to go to recover that lost ground, so beware of yet another false start.
However, Lloyds is now on course to be one of the most generous dividend stocks on the index. An income machine once more, as it was before the financial crisis. Today, it yields 5% with cover of 1.4. But this is expected to increase to 5.7% by the end of this year, with cover an even more robust 2.1.
The income is forecast to continue rising, with the dividend per share expected to hit 3.66p in 2019 to give a yield of 6.1%, covered twice. It could rise further, who knows, but let’s say you start building up a position in the stock now. You would need to have £140,000 in the stock for a 6.1% yield to beat State Pension income levels in today’s money, which would give you £8,540 a year. Lloyds could do that for you.
State Pension beater
That would be a mighty big holding for a single stock. Unless your portfolio is a lot bigger than mine, I wouldn’t recommend going all in on one company in this way. But it does show that if your entire portfolio is worth £140,000, a sprinkling of income stocks like Lloyds and you’ll have the State Pension licked. Here’s some to consider…
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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.