1 FTSE 100 dividend superstar I’d buy again over Lloyds shares right now

I recently sold my Lloyds shares and used part of the proceeds to buy this very high-yielding but out-of-favour stock instead. I’d do the same again now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bronze bull and bear figurines

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I sold my Lloyds (LSE: LLOY) recently for two key reasons.

First, it trades too much like a ‘penny share’ for my taste. Strictly speaking, it is not one as its market capitalisation is too big. But at just 56p a share, every penny it moves is nearly 2% of its value!

Second, it does not pay big enough dividends for me. Since I turned 50 a while ago, I have focused on buying shares with high yields so I can increasingly live off the income. 

These shares also need to appear set for growth, as this is what drives increases in dividends over time.

And they need to look undervalued, as this lessens the chance of big share price falls wiping out dividend gains.

I invested part of the proceeds from the Lloyds sale into British American Tobacco (LSE: BATS) based on this strategy.

Growth outlook

Consensus analysts’ forecasts are for Lloyds earnings to grow by 4.9% a year to the end of 2026. Earnings per share are forecast to increase by 8.4% a year over that period. And return on equity is predicted to be 11.3% by the same point.

For Lloyds, one risk is declining profit margins as interest rates fall in the UK. It also faces legal action for mis-selling car loans through its Black Horse insurance operation.

British American Tobacco, by contrast, is forecast to see its earnings increase by 49.4% a year to end-2026. Earnings per share are expected to increase by 47.8% a year over that period. And return on equity is predicted to be 16.4% by the same point.

For British American Tobacco, a risk is potential legal action for health problems caused by its products in the past. Another is a loss of competitive advantage caused by any delays in its transition to nicotine replacement products.

But overall, a clear win for the tobacco firm in this category, in my view.

Share price valuation

Using the key price-to-earnings (P/E) measurement, Lloyds currently trades at 7.8, against a peer group average of 7.6. So it looks slightly overvalued against its peers.

British American Tobacco trades at a P/E of 6.6, against a peer group average of 13.2. So it looks clearly undervalued.

Another clear victory for British American Tobacco, I think.

Dividend yields

Lloyds paid 2.76p a share in dividends in 2023, giving a yield on the current 56p share price of 4.9%.

British American Tobacco paid 230.89p in the same year, giving a yield on the present £24.76 share price of 9.3%.

The difference in yields is massive when it comes to the payouts I would receive over time.

For example, £10,000 invested in Lloyds at an average of 4.9% will give me an investment pot of £43,362 after 30 years. This would pay me £2,069 a year, or £172 a month in dividends.

But £10,000 invested in British American Tobacco at an average of 9.3% will result in more than three times the Lloyds amount.

Specifically, £161,068 after 30 years. This would pay me £14,251 a year, or £1,188 a month!

So, another huge win for the tobacco firm here as well, making three out of three.

Consequently, I am extremely pleased with my decision to swap Lloyds for British American Tobacco and would do the same again today.

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.

Simon Watkins has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and 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.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »