If I’d invested £1,000 in shares of Lloyds Banking Group (LSE:LLOY) five years ago, what would my investment be worth today? Lloyds shares have fallen since 2017, but the answer is probably more complicated than you think.
A lot of the investment return from Lloyds shares comes from the dividends the company pays to its shareholders. By reinvesting my dividends, I could have increased my stake in Lloyds by almost 20%.
But can the dividend that the company pays make up for the declining share price? And should I buy the stock at today’s prices?
Cash
Suppose first of all that I retained my dividends instead of reinvesting them. As a result, I’d still have the shares I started with, but I’d have cash from the dividends that I’d received.
Five years ago, Lloyds shares were priced at 66.6p per share. So with £1,000 I could have bought 1,500 shares.
Today, Lloyds shares trade at 42.42p per share. So I could sell 1,500 shares today for around £636.
I’d also have the cash that the company had paid out to me, though. Since 2017, this amounts to 9.75p per share.
With 1,500 shares, I’d have received a total of £146 in dividend income. Adding this to the £636 market value of my shares would mean that my investment from five years ago would be worth £782.25 today.
Reinvesting
Alternatively, I could have reinvested the dividends that I’d have received. Doing this would have increased my stake in the company gradually over time.
For example, Lloyds paid out 2.05p per share in May 2018. With 1,500 shares, I’d have received £30.75.
In May 2018, Lloyds shares were priced at 63.35p. As a result, I could have bought another 49 shares with the dividends I’d been paid.
That would have increased my stake in the company by just over 3%. And I could have repeated this process each time I received a dividend payment.
Doing this for five years would mean that I would have increased my investment by 295 shares. In other words, my stake in Lloyds would have increased by just over 16%.
With a total of 1,795 shares, I’d have an investment with a market value of £761. And I could keep doing this to grow my investment further.
Should I buy Lloyds shares?
There’s no doubt in my mind it’s better for me to buy shares in Lloyds Banking Group now than it was five years ago. This is true even factoring in the dividends that I’d have received.
To me, the shares look cheap today. Rising interest rates should help the bank moving forward, and I certainly think that the risk of serious harm from loan defaults is lower than it has been in the past.
I think that owning shares in a high-quality bank can provide an investor like me with a steady return over time. Over the last five years, shares in Lloyds have been relatively disappointing, but I’d be willing to buy the stock today in the expectation of better things in the future.
