Lloyds shares pay over 5% a year in cash. But there’s more to them than that!

Lloyds shares have dropped more than 20% from their 2023 high in early February. But I’m holding on tightly to my shareholding for these four reasons.

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In the run-up to the global financial crisis (GFC) of 2007-09, my investment portfolio was packed with financial stocks. But as capitalism looked like it was starting to crumble at the time, I sold almost every one of these stocks, including my Lloyds Banking Group (LSE: LLOY) shares.

Sliding shares

For much of the next 13 years, I rarely owned any banking or finance stocks. But in late June 2022, my wife bought Lloyds shares for our family portfolio. She paid an all-in price (including buying commission and 0.5% stamp duty) of 43.5p a share.

At its 2023 high, the Lloyds share price peaked at 54.33p on 9 February. However, within a month, banking stocks plunged worldwide as several mid-sized US banks failed. Of course, Lloyds shares duly followed suit.

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Here’s how this popular and widely held share has performed over eight different timescales:

One week+1.8%
One month-5.2%
Three months-11.8%
Six months+2.7%
One year+7.6%
Two years-2.6%
Three years+57.9%
Five years-29.5%

Over the past month, Lloyds shares have lost over 5% of their value, while they’re down almost 12% in three months.

On Friday, the stock closed at price of 46.72p, valuing the group at £30.5bn. This leaves the share price a hefty 21.3% above its 52-week low of 38.51p, hit on 13 October of last year.

Why we own Lloyds today

Clearly, owning bank shares has become much riskier, given the recent failure of four US banks and the emergency rescue of Swiss giant Credit Suisse. So why haven’t we sold our Lloyds stock, much as I did in 2007-08?

The first point I’d make is that I expect a bright future for the Black Horse bank. Though a few American banks have got into trouble, UK banks are more strongly capitalised than they’ve ever been.

Second, during the Covid-19 crisis of 2020-21, Lloyds and other major UK banks suspended their dividends. But this cash payout was restored on 13 September 2021, beginning with an interim payment of 0.67p per share.

At present, Lloyds shares offer a trailing (that is, historic) cash yield of over 5.1% a year, versus 3.7% for the wider FTSE 100 index. To me, that’s ample reward for owning this stock for the long term.

Third, Lloyds is buying back £2bn of its own stock in the open market. Doing this will reduce the size of its share base by around 6.6%. Over time, this boosts future earnings per share and dividend yields (all else being equal).

Finally, I expect the Lloyds share price to move substantially higher over the next two to five years. That’s because this stock trades on a lowly price-to-earnings ratio of under 6.5. And while we wait patiently for this re-rating, my wife and I will hold on tightly to our Lloyds shareholding!

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliff D’Arcy has an economic interest in Lloyds Banking Group shares. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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