Why I think the Lloyds share price has the best dividend in the FTSE 100

Lloyds Banking Group plc (LON: LLOY) has one of the highest dividend yields in the FTSE 100 (INDEXFTSE: UKX) and it looks to be the most secure too, says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

According to my research, at the time of writing there are 23 companies in the FTSE 100 that support dividend yields of 6% or more. Of these companies, only eight have a dividend cover ratio, where earnings per share covered the expected dividend per share of at least 1.5.

Two of these businesses are homebuilders, which some investors might not feel comfortable with, and one is the struggling holiday group Tui. There’s also airline group IAG, another business some investors might not be comfortable owning.

This leaves just four companies in the FTSE 100 with dividend yields of more than 6% and dividend cover ratios of 1.5. Two of the remaining companies are insurers, one is Royal Bank of Scotland, and the last one is Lloyds Banking Group (LSE: LLOY).

Today, I’m going to explain why I believe Lloyds has the highest and safest dividend yield in the whole FTSE 100. 

Too much capital 

Lloyds has a problem most businesses can only dream of. The bank has too much money. Ever since the group’s state bailout during the financial crisis, management has been working flat out to reduce costs and put the company back on a stable footing. After a decade of hard work, it’s done just that.

At the beginning of May, the bank reported a pre-tax profit of £1.6bn for the first quarter of 2019, and its capital position is one of the best in the European banking sector. The group reported a pro forma CET1 ratio of 13.9% for the year ending December 2018.

To celebrate its improving results, Lloyds declared a £1.75bn share buyback, bigger than many analysts had forecast, and raised the prospect of further substantial capital returns later in 2019.

Highly profitable

Lloyds is better positioned to return capital to investors than virtually all of its UK banking peer group. According to the Financial Times, during the first quarter of 2019, the bank was the only business to report a return on tangible equity above its cost of equity. Return on tangible equity was 12.5% for Q1.

City analysts don’t expect Lloyds’ profits to come under pressure anytime soon either. They reckon the group will report a net profit of at least £5.6bn per annum for the next two years.

Further cash returns

The fact that Lloyds is already well capitalised seems to indicate management will look to return a significant portion of profits over the next two years, and that tells me shareholders could be in line for big cash rewards.

The numbers also tell me the bank’s current dividend is exceptionally safe for the time being. Indeed, payout cover is expected to increase to 2.2 times next year, based on current City earnings expectations for the group, which implies profits would have to drop by 50% before management would have to reconsider reducing the dividend.

So, after considering all of the above, I believe not only is the Lloyds dividend safe, but it’s also the most attractive in the FTSE 100 today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »