Lloyds (LSE: LLOY) shares continue to trade well below their highs. Currently, they can be snapped up for just 58p each.
Could an investment in Lloyds today help to build generational wealth? Let’s discuss.
A cheap stock
Lloyds shares do look cheap relative to the market today. This year, analysts expect the bank to generate earnings per share of 6.4p. So, at the current share price, the forward-looking price-to-earnings (P/E) ratio is just nine. That’s well below the market average of around 14 so there could be some value on offer here.
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Meanwhile, there’s a decent dividend yield too. For 2024, Lloyds is forecast to pay out 3.2p per share. That means a yield of about 5.5%, higher than interest rates on offer from most savings accounts.
A poor long-term investment in the past
Yet if my goal was to build generational wealth (and it is), I’d be looking beyond Lloyds shares.
One reason for this is that Lloyds has a poor long-term track record when it comes to creating wealth for its investors due to the fact that its profits are volatile.
Ten years ago, the bank’s share price was 73p. Today, it’s 58p. In other words, over the last decade, the business hasn’t created any capital gains for its investors.
That’s very disappointing given that we have been in a huge global bull market for stocks.
Now, things could be different going forward, of course. But the stock’s track record doesn’t fill me with confidence.
Given the past performance, I wouldn’t expect to generate high returns from the shares in the future. Especially now that interest rates are likely to fall (higher rates are generally better for banks).
How I’m aiming to build wealth
So, how am I trying to build wealth for future generations?
Well, instead of snapping up cheap stocks, I’m investing in ‘high-quality’ stocks (just like Warren Buffett does).
I’m looking for companies that have:
- A competitive advantage that gives them an edge over the competition
- Consistent earnings growth
- A high level of profitability
- Strong long-term growth prospects
- An excellent track record when it comes to generating shareholder wealth
History shows that these kinds of companies tend to be excellent long-term investments and can help to build generational wealth. Just look at Buffett. He’s now worth over $100m!
A good example of a high-quality company – and one that Buffett himself is invested in – is Visa (NYSE:V), which is listed in the US (but can still be bought for an ISA or SIPP).
Its business model (it operates a large global payments network) can’t easily be replicated. Meanwhile, it’s very profitable and has fantastic long-term growth prospects since the world is shifting from cash to electronic payments.
Over the last 10 years, its share price has risen from around $55 to $265. The company has also paid regular dividends. So, it has been a brilliant long-term investment overall.
Of course, there’s no guarantee that it will continue to outperform going forward. There’s a chance that its business model could be disrupted by technology.
I’m very bullish on the stock though. Currently, it’s a top 10 holding in my portfolio.
Readers can find more examples of high-quality stocks like this (including plenty of UK-listed ones), right here at The Motley Fool.
