I don’t have unlimited reserves of cash I can use to buy UK shares. So I’m looking for the best cheap FTSE 100 shares to buy today.
Should I add these two cheap dividend stocks to my investment portfolio?
Lloyds Banking Group
At 5.4%, Lloyds Bank (LSE:LLOY) shares offer a dividend yield comfortably north of the 3.9% FTSE 100 average. Yet despite this I don’t see the business as an attractive way to boost my income.
The profits these companies make are highly dependent on broader economic conditions. Loan defaults can soar, as Britain’s banks witnessed last year (credit impairments at Lloyds soared to £1.5bn in 2022). It can also be a fierce struggle to grow revenues in difficult times.
The problem for this particular bank is twofold. The UK economy looks set for a prolonged period of weak GDP growth due to severe structural issues like labour shortages, weak private and public investment, low productivity and Brexit-related trade disruption.
And unfortunately Lloyds doesn’t have exposure to foreign climes to offset probable weakness at home. HSBC (LSE:HSBA) and Santander, by comparison, can look to fast-growing Asia and Latin America respectively to turbocharge profits. Barclays investors can expect the company’s US operations to boost the bottom line.
I’m also mindful that unfavourable interest rate movements might cause earnings disappointment for Lloyds.
It’s possible that the Bank of England (BoE) might keep tightening policy to combat persistent inflation. This would boost the margin between the interest they charge borrowers and offer to savers still further, boosting profits in the process.
But comments from key policymakers in recent weeks casts doubt on any additional monetary tightening. Just today BoE rate setter Swati Dhingra called for interest rates to be frozen at current levels of 4%.
These long-term threats mean that I’m keen to avoid Lloyds shares. Not even a rock-bottom price-to-earnings (P/E) ratio of 7.5 times is enough to tempt me to invest.
HSBC Holdings
I believe the aforementioned HSBC would be a better way for me to invest in London’s banking sector. This business certainly offers superior value for money compared with Lloyds share price, at least on paper.
The Asian banking giant trades on a forward P/E ratio of 6 times. and carries an 8.1% dividend yield for 2022. But better value isn’t the only reason.
It’s true that HSBC also faces significant risks of its own. Lower-than-expected interest rates would also damage the profits it makes on its lending activities. On top of this, uncertainty surrounds its key Chinese market and neighbouring territories as the Covid-19 crisis endures.
But as a long-term investor I’d be happy to absorb these risks. This is because I believe the eventual returns this share delivers could be spectacular as emerging market demand for financial services soars. Banking product penetration remains extremely low while personal wealth levels are rising strongly.
HSBC served a whopping 39m customers in 2022. I’m expecting the number to keep soaring as the banking market balloons and the firm invests billions of dollars to expand.
