Why this FTSE 100 dividend champion could beat Lloyds Banking Group plc

Roland Head compares this FTSE 100 (INDEXFTSE:UKX) heavyweight with Lloyds Banking Group plc (LON:LLOY).

| 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.

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.

Born-again business Lloyds Banking Group (LSE: LLOY) has now escaped from state ownership, leaving the taxpayer with a modest profit. Its improving outlook has even convinced banking cynic and income fund manager Neil Woodford to buy Lloyds shares for his funds.

Does this mean it is now officially the best dividend stock in the FTSE 100? Perhaps. But there are some potential alternatives.

FTSE 100 property group Land Securities Group (LSE: LAND) saw its underlying pre-tax profit rise by 5.5% to £382m during the year to 31 March. The group will pay a final dividend of 11.7p, lifting the total payout for the year by 10.1% to 38.55p.

Should you invest £1,000 in Land Securities Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Land Securities Group Plc made the list?

See the 6 stocks

Land Securities’ portfolio has two parts — prime London office and retail space, plus regional shopping centres and retail parks. Brexit hasn’t had much of an impact on the firm yet, but Thursday’s full-year results make it clear that it has made thorough preparations for a potential slowdown.

The group’s loan-to-value ratio is just 22.2%, which is much lower than most peers. Land Securities’ average unexpired lease term is 9.1 years, the longest on record for the firm. Financing is in place to match this. The group’s outstanding debt has an average of 9.4 years until maturity and its average interest rate fell from 4.9% to 4.2% last year.

This all adds up to a very robust picture, in my view. The only potential risk is that vacancy levels across the like-for-like portfolio have increased over the last year, rising from 2.4% to 4.6%. This needs watching, but I think it’s likely to be a short-term concern. Land Securities properties are generally of high quality and in good locations. Historically, demand for such properties — especially in London — usually remains firm over long periods.

It currently trades at a 22% discount to its adjusted net asset value of 1,417p per share, and offers a 3.5% dividend yield. In my opinion, the shares could be a good long-term income buy for UK investors.

Lloyds’ yield is nearly double

It’s true that Lloyds offers a forecast dividend yield of 5.7%, nearly double that of Land Securities. But the bank’s long-term income is dependent on many of the same risk factors as Land Securities.

Just as a recession would hit demand for office and retail space, it would also be likely to affect the credit quality of Lloyds’ mortgage and credit card customers. New borrowing rates would probably fall, and arrears could rise sharply.

It may also be worth noting that while analysts expect Land Securities’ earnings per share to rise by 5% in 2018, Lloyds’ earnings are expected to fall by about 4% next year. The bank’s asset backing isn’t so strong either. Lloyds’ current share price of 71p represents a 25% premium to its tangible net asset value of 56.5p per share. That’s a perfectly reasonable valuation for a healthy, profitable bank, but means the downside protection is limited if earnings slump.

Although Lloyds’ turnaround has been mightily impressive, it remains to be seen whether the bank can now deliver stable earnings and dividend growth over long periods. But my overall view is that both Lloyds and Land Securities are attractive long-term income buys at current levels.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »