I bought Lloyds (LSE: LLOY) shares in November and again last month, on both occasions when the stock dipped below 45p. Now I find myself thinking about buying more of the bank, instead of diversifying into another FTSE 100 stock such as grocery giant Tesco.
I’m curious to find out why this is, and whether it is justified by the opportunities these two dividend income stocks offer my portfolio.
Two strong dividend stocks
The obvious appeal of buying Lloyds is that its shares look cheap trading at just 6.16 times earnings. That makes Tesco look relatively expensive, trading at 11.94 times. Sometimes I think I put too much store in the price-to-earnings ratio, but it gives Lloyds the edge here.
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Another advantage is that Lloyds should pay me more income. It currently yields 5.32% a year, against Tesco’s 4.15%. The Lloyds payout is covered three times earnings, while Tesco has cover of two. That’s still pretty good, but Lloyds has more scope for progression, and consensus analyst forecasts appear to confirm that.
They reckon Lloyds is on course to yield 6.83% in 2024, while Tesco will yield 4.13%. So the gap between the two looks set to widen. Given that a key benefit of investing in dividend stocks is the opportunity for a rising income over time, Lloyds also looks more tempting here.
Both stocks are menaced by inflation, which pushes up labour costs and makes customers poorer. Interestingly, they have both been criticised for taking advantage of higher consumer prices. Lloyds has been accused of ripping off savers by failing to pass on base rate hikes, while campaigners accuse Tesco of food price profiteering.
Lloyds does have one advantage that Tesco doesn’t. With interest rates expected to climb higher, the bank can widen its net interest margins, the difference between what it charges borrowers and pays savers. On the other hand, with the property market under pressure, the bank could see a rise in debt impairments. So I’ll call that a tie.
My instincts look correct
Both stocks have failed to deliver much share price growth. Measured over five years, the Lloyds share price is down 28.8%, where Tesco is up just 5.49%. Over the last year, their shares are up 3.12% and 5.24% respectively.
The upside in both cases is that this reduces the risk of overpaying. The downside is that both lack share price growth prospects. But with Lloyds at least I should get a high and rising income to compensate for that.
Both are struggling to make progress amid an ailing UK economy and also face stiff competition from rivals. With Lloyds, it’s from the new breed of challenger banks, while Tesco is fighting a dogged rearguard action against the discounters. I don’t think challenger banks such as Aldermore, Charter, and Shawbrook have the firepower of Aldi and Lidl.
So again, Lloyds comes out on top, vindicating my warm feelings towards the stock. It’s not a guaranteed winner — no share is — but I’ll keep reinvesting my dividends while I wait for its share price to kick on. One day it has to, doesn’t it?
