Sinking share prices on the FTSE 100 have supercharged the yields on many dividend stocks. For income investors, this provides a chance for them to boost their passive income at little cost.
Lloyds Banking Group (LSE:LLOY) has attracted lots of interest from Hargreaves Lansdown customers recently. Levels of dip-buying here are strong following the company’s 11% share price decline since early March.
All-round value
As I write, Lloyds is the FTSE index’s third most-purchased share via Hargreaves Lansdown in the past seven days (accounting for 1.92% of all buy orders).
I can see why the so-called Black Horse Bank is riding high in this beauty contest. It trades on a rock-bottom forward price-to-earnings (P/E) ratio of 6 times. Meanwhile, its dividend yield for 2023 sits at 6.2%.
But I’m not prepared to spend my hard-earned cash on Lloyds shares today. I think the bank’s low valuation fairly reflects the huge degree of risk it exposes investors to.
Under pressure
On the plus side, rising interest rates will boost the difference between the interest it charges borrowers and offers savers. The Bank of England benchmark is tipped to peak at 5.5% in the coming months. If ‘sticky’ inflation persists, rate estimates could keep being raised too.
Yet the banks may not be able to capitalise on further rate increases as they have done. This is because the pressure on them to pass the benefits of higher rates to their customers is rising. Last week, MPs on the influential Treasury Committee again bemoaned the “measly” savings rates that Lloyds et al are offering and urged them to “up their game”.
Intensifying competition also means traditional banks may have to become more generous with what they offer savers. Data from Which? shows that challenger banks paid an average rate of 0.57% in the past three years, versus 0.16% from high street banks.
A reluctance to raise savings rates has been a big boost to profits since late 2021. But this tactic may run out of road as cash-strapped savers search for better returns.
Loan demand falls
Finally, I fear that retail banks like this may struggle to grow loan volumes as the UK economy struggles. First-quarter loans and advances dropped £2.6bn from the previous three months in a possible sign of things to come.
Especially worrying for Lloyds are signs that the home loan demand is sinking. Latest Bank of England data showed that 48,690 new mortgages were signed off in April. This was down 5% month on month, and a whopping 26% from April 2022.
This is a particular concern for the bank, given its position as Britain’s biggest home loan provider. With the UK economy set for prolonged weakness loan demand across the board could sink while credit impairments (which rose another £243m in quarter one) might also keep ticking higher.
Lloyds shares offer exceptional value, on paper. But, right now, I’d much rather buy other dividend stocks for my portfolio.
