Are you carefully stashing some cash into a savings account each month? It’s good to save cash for holidays, boiler repairs, and emergencies.
But with best buy interest rates now as low as 1.3%, your cash savings won’t generate very much income or growth. If you’re saving for retirement, I think it makes more sense to put your cash into the stock market.
Today, I want to explain why I think FTSE 100 firm Lloyds Banking Group (LSE: LLOY) could be a good starting point for a stock portfolio.
How long to double your money?
Before I talk about Lloyds, I want to take a look at how long it might take to double your money when saving in cash. If you saved £10,000 today at 1.3%, my sums show it would take 54 years to double your money, assuming you reinvested the interest each year. After 10 years, you’d have just £11,378.
By contrast, if you invested £10,000 at 6% for 10 years, you’d have £17,908. After 12 years you’d have doubled your money, assuming you reinvested the income each year.
This is why most of my spare cash — except my emergency fund — is invested in the stock market.
Why I like Lloyds
Banks got a bad name during the financial crisis. But that’s mostly in the past now. The main problem facing banks today is that interest rates are so low. This means profit margins are relatively slim.
In these conditions, it pays to be big. And Lloyds is one of the biggest. In addition to Lloyds Bank, the group’s brands include Bank of Scotland, Halifax, Scottish Widows, MBNA and Lex Autolease.
This means the group’s is one of the UK’s biggest providers of mortgage lending, retirement saving products, credit cards and car finance.
Lloyds also has the biggest high street branch network in the UK, which probably doesn’t surprise you. What might surprise you is it’s also the largest digital bank in the UK, with 16.4m online banking customers. Rival start-ups won’t find it easy to disrupt this business, in my view.
The only thing Lloyds can’t do very easily is expand. Personally, I don’t think that’s a major concern. Here’s why.
Slow and steady wins the race
Lloyds published its 2019 financial results last week. These showed a fairly reassuring picture. Although profit margins on mortgage lending remain under pressure, due to low interest rates, I think the group is in good financial health.
Because this 255-year old bank isn’t expanding very quickly, its operations generate quite a lot of spare cash each year. Much of this can be returned to shareholders, usually through a dividend. The stock’s dividend rose by 5% to 3.37p per share last year, giving a dividend yield of 6%.
In 2020, this payout is expected to rise by 5% again, to 3.53p per share. This gives the stock a forecast dividend yield of 6.2% for the current year. That’s the cash payout you might expect to get if you bought the shares today.
There may be some bumps in the road ahead, especially if the UK economy slows. But I’m confident Lloyds shares should be a reliable source of income for many years. I see the bank as a good stock to buy and tuck away for the future.
