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Lloyds’ dividend yield just hit 7%! Here’s why I’d invest £2k

Investors have been rushing to sell the Lloyds (LSE: LLOY) share price over the past few weeks. The stock is off around 10% since the beginning of February. What’s more, at the time of writing, it’s also down 25% from its 52-week high, printed in mid-December 2019.

After these declines, the lender’s dividend yield has spiked to more than 7%. Meanwhile, the stock’s price-to-earnings (P/E) ratio has slumped to 7.1. These metrics suggest Lloyds’ fundamentals have deteriorated substantially in recent weeks. But that really isn’t the case.

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Falling share price

Shares in Lloyds have declined in line with the broader market over the past few weeks. As the coronavirus has spread around the world, investors have started to become concerned about the impact the outbreak will have on the global economy.

As one of the UK’s largest banks, a broad-based economic slowdown is almost sure to have an impact on Lloyds. However, its the country’s largest mortgage lender and that means a significant percentage of its income comes from home buyers.

This hints that while the bank is unlikely to escape a slowdown altogether, it’s well-positioned to weather the storm. It’s unlikely that borrowers will stop paying their mortgages just because the outbreak is spreading.

Future growth

As such, now could be an excellent opportunity for long-term investors to snap up a share in Lloyds. Indeed, after nearly a decade of restructuring, the bank is now one of the healthiest lenders in Europe. Profits are booming, and it’s well-placed the benefit from any economic stimulus measures the government may announce over the next 12-months.

For the past three years, the spectre of Brexit has weighed on the group’s share price. Economic surveys suggest the economy was starting to recover to from this malaise in January and the beginning of February. Assuming this trend continues when the COVID-19 outbreak diminishes, Lloyds’ earnings could see strong growth over the next few years.

If the coronavirus outbreak doesn’t slow down anytime soon, the lender might have to make some tough choices. However, as mentioned above, its core business should continue to produce a stable, steady income, providing downside protection for investors.

Blue-chip income

As such, if you’re looking for blue-chip income, Lloyds could be a great addition to your portfolio. 

As mentioned above, the stock currently supports a dividend yield of 7.1%. Management has also shown willingness over the past few years to return additional capital to shareholders — when the time is right.

That indicates if the economy does recover strongly over the next few years, investors could be in line for big special dividends, or share repurchases, as the lender’s profits expand.

That said, in the short term, it’s impossible to tell if the shares will fall or recover from recent losses. Therefore, it might be best to avoid the stock if you’re not prepared to buy and hold the shares for the next few years.

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Rupert Hargreaves owns no share 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.