Bitcoin is up this morning. Yesterday it was down. The day before it was, oh, who cares. Trading crypto-currencies is a great way of driving yourself mad, a poor way of investing for your future.
Too much trouble
Buy-to-let may be backed by a real world asset but now it’s more trouble than it’s worth. Not only do you have to maintain the property and deal with tenants, you also have HM Revenue & Customs breathing down your neck.
That’s why I would rather invest in stocks and shares, using the annual £20,000 tax-free ISA allowance, which means all returns are free of income tax and capital gains tax – for life.
I like Lloyds
One of the UK’s most traded stocks is Lloyds Banking Group (LSE: LLOY), and it isn’t hard to see why. This is a high street banking stalwart, and a familiar name to all. Before the financial crisis, it was renowned as a dividend machine, one of the most reliable sources of income on the entire FTSE 100.
Afterwards, it was a pariah, like the rest of the banking sector. The dividend stopped and was only rebooted in February 2015. Today, though, it is rattling along nicely, offering a very juicy yield of 6.5%, more than four times the return on a best buy instant access Cash ISA.
And that’s only the start. City analysts reckon the yield could hit 6.8% later this year, then a thumping 7.2% in 2020. At that level, this stock will double your money in 10 years, even if the Lloyds share price goes nowhere. If that climbs too, you will enjoy an even greater total return.
Investors don’t have to worry about more PPI mis-selling claims any longer. Lloyds has shelled out more than £20bn in compensation, more than any other bank, but that is now a dead issue as the deadline for claims expired on Thursday.
It’s also cheap, but for a reason
Lloyds is trading at a bargain valuation of just 6.7 times forward earnings, well below the current average of 17.33 times across the FTSE 100 as a whole. There’s a reason for that, though. Despite its many attractions, Lloyds’ stock has fallen 20% over the last six months, as investors get anxious about the future for the UK economy due to Brexit and the wider global slowdown.
If we slip into recession and incomes suffer, Lloyds’ consumer customers could struggle to service their mortgages, loans and credit cards. Although the Bank of England may cut interest rates to ease the pressure, this could backfire by squeezing the bank’s net interest margins, the difference between what it charges to lend money and what it pays savers.
Invest for the long-term
So although Lloyds is cheap, the share price could fall further from here as there could be economic clouds ahead. However, the dividends are covered more than twice by income and should keep rolling in.
You should only invest in stocks like Lloyds for the long term, a minimum of five years but ideally much longer. That way short-term share price volatility isn’t an issue, but the dividends are. They should keep rolling in, all you have to do is reinvest them back into the stock, to fuel future growth.
No dividends are guaranteed, but right now Lloyds’ payout looks higher and more sustainable than most.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.