Lloyds (LSE: LLOY) shares are among the most popular on the FTSE 100, which is strange, given how badly they have performed for years.
Shares in Lloyds Banking Group peaked at 506.99p on 9 April 1998, and has come nowhere near that level since. Directly before the banking crisis, it traded at just 300p. At time of writing, they’re down to a mere 52.62p. That’s a 10th of their all-time high.
Here’s why people are buying this stock
One likely reason investors are buying Lloyds stock is that they reckon it’s undervalued and the recovery is just around the corner. If so, that’s been a long-term losing bet. Lloyds shares have fallen another 21% over the last five years.
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However, they’re up almost 15% over the last 12 months, as higher interest rates allow the bank to widen its net interest margins, the difference between what it pays savers and charges borrower.
I think the biggest and best reason to buy Lloyds shares is for income rather than share price growth. The UK economy isn’t suddenly about to go gangbusters. While it recently posted impressive pre-tax profits of £6.9bn, that was broadly the same as last year.
Management is keen to reward loyal shareholders, announcing a £2bn share buyback, but it’s the dividend that interests me. Lloyds now yields 4.6% a year, comfortably above the FTSE 100 average of around 4%, and I believe that will rise for three reasons.
First, management has just hiked the dividend by 20%, from 2p per share to 2.4p. Second, the current dividend is covered three times by earnings. And third, the forecast yield is 5.37% and still comfortably covered 2.7 times by earnings.
I’m spreading my risk around
Using today’s 4.6% yield, I would need to invest £26,087 into Lloyds shares to generate income of £100 a month. That’s more than the annual Stocks and Shares ISA allowance and, sadly, I don’t have that kind of money to hand.
Even if I did, I wouldn’t invest all of it in just one stock. My portfolio just isn’t big enough yet.
I prefer to spread my money among at least half a dozen FTSE 100 stocks. If I invested, say, £5,000 in Lloyds, I would get income of £230 a year, which works out at £19.17 a month. If next year’s forecast yield is correct, that will rise £268.50 next year, or £22.37 a month.
If the dividend continues to rise, so will my income. While I’m still working, I’ll reinvest all my shareholder payouts to buy more Lloyds shares. I may not generate income of £100 a month this year but, at some point in the future, I might get there.
As with any stock there is the danger of that Lloyds could run into serious problems and I get no income at all. That’s why I diversify between a number of stocks rather than go all in, and only buy shares for the longer run to overcome short-term volatility.
