Even though FTSE 100 banking biggie Lloyds Bank (LSE: LLOY) saw a softening in share price in January, after a bump up in December, it has made some gains from last year. If I had invested in LLOY sometime during January last year, I’d most likely have increased my capital by 13% by this point.
Capital gains aren’t a given
While somewhat encouraging, changes in the bank’s stock price have shown no secular rising trend over the long term. By long term, I mean since the financial crisis that happened over a decade ago. This means that even if I made some capital gains in one year, there’s no guarantee that it would continue.
I’m hopeful that we’ll see better times for LLOY moving forward as the economy picks up. The Bank of England kept interest rates unchanged last week as the latest readings for economic indicators show improvement, which can manifest in higher growth and better times for LLOY. I’m not holding my breath, though.
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A not too bad dividend yield
But what about its dividend yield? It’s true that the bank offer a decent 5.8% dividend yield. But it’s also true that it’s nowhere close to the highest yield offered in the FTSE 100 set. If income is my reason for investing, I’d much rather look at other FTSE 100 stocks. Even among the FTSE 100 financial services shares, there are those that offer a higher dividend yield than Lloyds Bank.
Consider the alternative income generator
One of these is the insurance provider Aviva (LSE: AV), with a dividend yield of 7.5%. As an investor looking to generate a passive income, I want to know if it can maintain the dividends.
To assess this, I first look at its past record of dividend payouts, which have been growing every year for the last few years. Next, I look at earnings per share, because there’s a good chance that the company would want to distribute more to shareholders as its earnings rise. This too, has been the case for AV in the past few years.
Its share price, however, has disappointed. The last time I wrote about it, the Aviva share price had just fallen after the company decided to retain its Asia business. From that point on, it did pick up after getting a post-election boost. But, at its last close, AV was back to its November levels.
My point is that Aviva, much like Lloyds right now, should be viewed more from the perspective of passive income generation than capital appreciation. Also, much like LLOY, its share price never quite recovered from the financial crisis, which means it’s not one for the growth investor either.
In this scenario, it’s clear to me that AV is a better investment at this point. I’d keep an eye on LLOY, but if financial services is my sector of choice, I’d buy Aviva.
